Bloomberg News

Alcoa Cut to Junk by Fitch as Aluminum Glut Hampers Earnings

April 12, 2014

Alcoa Inc. (AA:US), the largest U.S. aluminum producer, was cut to junk by a second ratings company as a global oversupply of the metal hampers profitability.

Fitch Ratings cut Alcoa’s credit grade one level below investment grade to BB+ from BBB-, it said yesterday in a statement. It sees Alcoa’s total debt (AA:US) remaining more than 2.5 times its earnings before interest, taxes, depreciation and amortization.

Alcoa is working to reduce dependence on the price of raw aluminum by shutting high-cost smelters and boosting sales of specialized shapes and alloys for customers in growing industries such as aerospace and autos.

The company (AA:US) was cut to junk by Moody’s Investors Service in May. Standard & Poor’s rates its debt BBB-, the lowest investment-grade level. New York-based Alcoa was removed from the Dow Jones Industrial Average on Sept. 10 after 44 years.

“Alcoa is aggressively transforming the company -- building out our value-add businesses and improving our competitive position by lowering the cost base of our commodity business,” the company said yesterday in an e-mailed statement. “Our debt is at the lowest level it’s been since 2007, and we have no significant maturities due before 2017.”

Fitch said that this year and next it expects Alcoa’s profit to continue to reflect weakness in the price of aluminum, as its debt-to-Ebitda ratio rises to as much as 2.9.

‘Hefty’ Growth

“Alcoa’s prospects are founded upon projected hefty market growth in aerospace and North American aluminum auto sheet demand,” Carol Levenson, an analyst at New York-based Gimme Credit LLC, said in a research note yesterday. “The company continues to attempt to combat lower aluminum prices via capacity curtailment, leading to higher productivity and other cost savings.”

Credit-default swaps linked to Alcoa jumped 26 basis points yesterday to 179, according to prices compiled by data provider CMA, which is owned by McGraw-Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. The contracts were still trading near the lowest level in three years after reaching 470 basis points in October 2011.

A basis point equals $1,000 annually on a contract protecting $10 million of debt. The swaps pay the buyer face value if the referenced borrower fails to meet its obligations, less the value of the defaulted debt.

Alcoa said April 8 that it expects global aluminum consumption to outpace production by 730,000 metric tons.

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

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


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Companies Mentioned

  • AA
    (Alcoa Inc)
    • $15.05 USD
    • 0.62
    • 4.12%
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