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Rating Action:

MOODY'S LOWERS RATINGS FOR WISE METALS GROUP; SR. SEC'D NOTES AND CORPORATE FAMILY RATING LOWERED TO Caa1

19 Aug 2005
MOODY'S LOWERS RATINGS FOR WISE METALS GROUP; SR. SEC'D NOTES AND CORPORATE FAMILY RATING LOWERED TO Caa1

Approximately $150 Million of Debt Securities Affected

New York, August 19, 2005 -- Moody's Investors Service downgraded its ratings for Wise Metals Group LLC (Wise) in view of the company's weak profits, negative cash flow, very limited liquidity, and the increased burden posed by its $271 million of debt, which is about $100 million higher than when the company was first rated in April 2004. While the company may be able to pull cash out of working capital over the next several quarters, any improvement is likely to be modest and does not, in Moody's opinion, offset the increased risk associated with Wise's high leverage and limited liquidity. Wise ended the June 2005 quarter with about $3 million of availability under its $125 million revolving credit facility, which leaves the company weakly positioned to withstand any adverse financial or operating setbacks, although availability has improved to $12 million as of August 12.

The following ratings were lowered:

$150 million of 10.25% senior secured notes due 2012, to Caa1 from B2,

corporate family rating, to Caa1 from B2.

Moody's affirmed its SGL-4 speculative grade liquidity rating, indicating weak liquidity, and maintained its negative rating outlook for the company.

While market fundamentals for Wise's can stock and common alloy aluminum products have been solid over the last year, higher costs -- for aluminum, transportation, energy, and other operating materials -- have limited its ability to take advantage of higher shipments and improved plant utilization. As a result, conversion margin per pound has not materially improved, averaging less than 5 cents/pound over the 12 months ended June 30, 2005, and Adjusted EBITDA for the same period was $31 million. In addition, higher aluminum costs, as well as increased shipments, have required an approximate $89 million investment in working capital since March 2004 and interest expense has been higher than expected. Therefore, Wise's free cash flow (cash from operating activities minus capex) was negative in each of the last five quarters and has totaled negative $94 million over this period. This has pushed revolver borrowings up to $119 million (and $3 million in letters of credit) and total debt up to $271 million, as of June 30, 2005, whereas pro forma debt was $176 million when Moody's first rated Wise in April 2004. Given Wise's earnings potential and business model, this is a significant debt burden.

The negative rating outlook remains in place to reflect the challenges Wise faces in expanding its conversion margin such that cash flow will be assured of not only covering its ongoing interest, capex and working capital requirements, but will also allow for a meaningful reduction in debt. Wise is also trying to move away from providing price caps on the metal transfer price offered to can sheet customers, but these discussions may not be successful. Regarding working capital, inventory reductions could be difficult to realize if recent aluminum price increases hold up. In addition, Wise's strategic move to increase sales of common alloy products will probably require higher inventories of these products.

Wise could be downgraded further if its cash flow does not increase in the second half of 2005, debt remains high, and liquidity does not improve or credit facility covenants are in danger of being violated. Factors that could restore Wise's stable outlook include sustained improvement in conversion margins and cash flow, net liquidity above $50 million, and total debt below $225 million, all other things equal.

Moody's ratings reflect Wise's dependence on a narrow but expanding range of product capabilities, concentration of sales among few customers, and lack of pricing power in a mature market dominated by two much larger and financially stronger competitors, Alcoa and Novelis. Market share concentration and intense competition among packaging companies and their customers, the beverage companies, as well as competition from other packaging materials such as plastics and glass, have limited the operating margins earned by producers of can stock and this is expected to continue. The ratings are buoyed by the technological capabilities of Wise's Listerhill facility, the progress Wise has made in expanding its can stock customer base and common alloy sales, and the current high level of industry capacity utilization.

Wise Metals Group LLC produces aluminum can stock and packaging products from a casting and rolling facility in Muscle Shoals, Alabama. The company has its headquarters in Baltimore, Maryland.

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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