Alcoa May Be Cut to Junk by Moody’s on Lower Aluminum

Alcoa Inc. (AA), the largest U.S. aluminum producer, may have its credit rating cut to junk by Moody’s Investors Service Inc. after the price of the metal slumped.

Moody’s placed Alcoa’s Baa3 senior unsecured rating, the lowest investment-grade level, under review for downgrade, the ratings company said today in a statement. The review applies to all of Alcoa’s $8.3 billion of debt, according to the statement.

The review “reflects the challenging headwinds” facing the New York-based company, Moody’s said. The recovery in the aluminum industry is “slow and uneven” and the price of the metal will remain at 85 to 95 cents a pound for the next several quarters, it said.

“We do not see a material, sustainable improvement in aluminum prices over the next several quarters and expect Alcoa’s earnings performance and debt-protection metrics to remain challenged,” Moody’s said.

Chief Executive Officer Klaus Kleinfeld has worked to increase Alcoa’s profitability in divisions that produce engineered aluminum products and supply aerospace customers while cutting costs in its mining and smelting segments. Alcoa lowered its global aluminum consumption forecast in October because of a slowdown in demand in China, the world’s largest user of the metal.

Aluminum prices on the London Metal Exchange have averaged $2,051 this year, 15 percent lower than last year and touched a 34-month low in August as global supply exceeded demand.

Shares Fall

Shares of Alcoa fell 1.8 percent to $8.75 at 5:36 p.m. in New York after the close of regular trading. Alcoa’s $1.25 billion of 5.4 percent senior unsecured notes fell 0.6 cents to trade at 105.6 cents on the dollar, yielding 4.6 percent. Its $625 million in 5.95 percent senior unsecured notes traded down 2.2 cents to 101 cents on the dollar today, yielding 5.9 percent, according to prices compiled by Bloomberg.

“Alcoa is committed to its investment grade rating,” Lori Lecker, a spokeswoman for Alcoa, said in an e-mail today. “Over the last four years, the company has taken significant action to defend our investment grade rating.”

The company has cut $5 billion in costs since 2008 through productivity improvements such as increasing yields out of its refineries and streamlining operations, Alcoa said at its Nov. 7 investor day.

Earlier this month, the company began producing metal at its Saudi Arabian joint venture, a $10.8 billion plant that will include Alcoa’s lowest-cost production complex.

Capacity Cuts

The company is expected to earn 26 cents a share this year, excluding one-time items, according to the average of 19 analysts’ estimates compiled by Bloomberg. That’s less than a 10th of the company’s earnings in 2007 before the global financial crisis.

In January, Alcoa said that it would cut production capacity by 12 percent. Rio Tinto Group, the second-largest producer, said in July it reduced output by 15 percent at a plant in New Zealand after prices fell. Norway’s Norsk Hydro ASA (NHY), the fifth-biggest producer, said in June it would shut 120,000 tons of capacity in Australia because of weaker demand and oversupply.

Alcoa is organized into four segments: alumina, which mines bauxite and processes it into the precursor to aluminum; primary metals, which smelts aluminum; flat-rolled products, which makes sheets used in beverage cans as well as airplane wings and car parts; and engineered products and solutions, which makes aerospace fasteners, turbine blades and truck wheels, according to its website.

To contact the reporter on this story: Sonja Elmquist in New York at selmquist1@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.