Alcoa Cut to Junk by Moody’s as Aluminum Price Declines

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An Alcoa Inc. employee changes the glowing hot carbon anode of an electrolytic cell at the company's Mt. Holly production plant in Goose Creek, South Carolina. Close

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An Alcoa Inc. employee changes the glowing hot carbon anode of an electrolytic cell at the company's Mt. Holly production plant in Goose Creek, South Carolina.

Alcoa Inc. (AA), the largest U.S. aluminum producer, had its credit rating cut to one level below investment grade by Moody’s Investors Service after the metal’s price fell amid a global oversupply.

The long-term rating on Alcoa’s $8.6 billion of debt was lowered by one step to Ba1 from Baa3, Moody’s said in a statement yesterday. The outlook is stable, indicating the rating won’t be reduced again soon.

“The aluminum price has been in a downward decline since reaching post-recession highs in 2011,” Moody’s said in the statement. Strength in the automotive and aerospace industries isn’t sufficient for a “significant” recovery in profitability and Alcoa won’t achieve investment-grade metrics within Moody’s rating horizon, Moody’s said.

While Alcoa, based in New York, has shuttered high-cost smelting capacity, expanded profitable segments and reduced costs, aluminum prices have fallen as a result of slowing economic growth in China and rising global production.

“We believe Moody’s decision is a greater reflection of macroeconomic conditions and the volatility of metal prices than a true statement of the financial and operating strength of Alcoa,” the aluminum producer said in a separate statement.

Photographer: Carla Gottgens/Bloomberg

Aluminum rods display the Alcoa Inc. logo. Alcoa faces higher borrowing costs and losing bond investors who are restricted to lending to investment-grade companies. Close

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Photographer: Carla Gottgens/Bloomberg

Aluminum rods display the Alcoa Inc. logo. Alcoa faces higher borrowing costs and losing bond investors who are restricted to lending to investment-grade companies.

Alcoa (AA) fell 1 percent to $8.49 at the close in New York. The shares have dropped 2.2 percent this year.

Alcoa Overtaken

Moody’s rating of the company’s senior unsecured debt has slipped six levels since 2002. In that time, Alcoa has lost its position as the world’s most valuable materials company to Australia’s BHP Billiton Ltd. (BHP), while Rio Tinto Group and Russian and Chinese aluminum producers took a greater share of the aluminum market.

The metal is the third-worst performer on the UBS Bloomberg CMCI index of commodities in the past five years, with a negative return of 47 percent. Global output has exceeded demand for the past eight years, data compiled by Bloomberg show.

Yields on Alcoa’s 5.4 percent bonds due April 2021 rose six basis points to 4.85 percent yesterday, the highest since April 22, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That compares with an average 3.78 percent for U.S. metals, mining and steel company debt, according to Bank of America Corp. Merrill Lynch indexes.

Debt Reduction

In order to meet Moody’s criteria for investment grade with $3 billion of annual earnings before interest, taxes, depreciation and amortization, Alcoa would need to reduce debt by $2.8 billion, the ratings company said. Alcoa may generate $2.71 billion of Ebitda this year, according to the average of 14 analysts’ estimates compiled by Bloomberg.

Alcoa is working to pay off debt and reduce costs by closing smelters and finding ways to operate more efficiently. The company’s debt has fallen to $8.83 billion, its lowest since 2008, when borrowings surged 32 percent to $10.6 billion, according to data compiled by Bloomberg.

Alcoa plans to pay off $422 million in notes due in July and may be helped by the conversion into equity of its $575 million of 5.25 percent notes due March 2014. Those securities can be swapped for stock at about $6.43 per share.

This month Alcoa said it will shut two production lines at its Baie-Comeau smelter in Quebec and postpone a new line at the plant until 2019. The company said May 1 it’s evaluating 460,000 metric tons, or about 11 percent, of annual smelting capacity for curtailment or permanent halt by the end of next year. It reduced smelting capacity by 13 percent in 2012 with cutbacks in Tennessee, Texas, Italy and Spain.

New Smelter

Chairman and Chief Executive Officer Klaus Kleinfeld is looking to add lower-cost capacity with a new 740,000-ton smelter that’s part of a venture with Saudi Arabian Mining Co. (MAADEN)

Alcoa is also boosting sales at its engineered- and rolled-products divisions, which sell aluminum and aluminum alloys to the automotive, aerospace and energy industries. Kleinfeld is betting that record backlogs at aircraft makers replacing aging jets and car producers using more aluminum will shift Alcoa’s product mix to complex, higher-profit products.

On April 8, the company reported a 59 percent increase in first-quarter net income, exceeding analysts’ estimates, after cutting $247 million in costs through productivity gains and increasing sales at its engineered-products division.

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

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