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Rating Action:

MOODY'S RATES SR. SEC'D NOTES OF WISE METALS GROUP B2; SGL-3 LIQUIDITY RATING; STABLE OUTLOOK

27 Apr 2004
MOODY'S RATES SR. SEC'D NOTES OF WISE METALS GROUP B2; SGL-3 LIQUIDITY RATING; STABLE OUTLOOK

Approximately $150 Million of Debt Securities Affected

New York, April 27, 2004 -- Moody's Investors Service assigned first-time ratings to Wise Metals Group LLC (Wise), the third largest producer of aluminum beverage can stock in North America. The following ratings were assigned:

B2 for the proposed $150 million senior secured notes, due 2012, jointly issued by Wise and Wise Alloys Finance Corporation,

B2 senior implied rating,

Caa1 senior unsecured issuer rating, and

SGL-3 speculative grade liquidity rating.

The rating outlook is stable. Proceeds from the proposed note offering and approximately $23 million of bank revolver borrowings will be used to repay all existing debt and redeem small amounts of preferred and common shares from inactive members.

Moody's ratings reflect Wise's dependence on a single asset, dependence on sales chiefly to two customers, and lack of pricing power in a mature market dominated by two much larger, financially stronger, and fully integrated competitors, Alcan and Alcoa. Wise may not have the financial resources required to adapt to significant technological or aluminum can design changes. 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 supported by the technological capabilities of Wise's Listerhill facility, its fairly stable conversion costs, and the modest but encouraging progress it has made in expanding its can stock customer base.

The stable outlook assumes that Wise will be able to maintain stable conversion margins, i.e., will be relatively unaffected by changes in aluminum metal prices, and that its conversion costs can be flexed in response to changing demand. Factors that could lead to a negative outlook include loss of market share or a major customer, material margin compression, inability to source adequate supplies of scrap aluminum at historical discounts (around 11 cents per pound) to primary aluminum, reduced liquidity, or increased debt. Primary factors that could change the outlook to positive include consistent attainment of management's financial forecast, further cost reductions, inroads into new, higher margin markets, or a significant reduction in leverage.

Aluminum used in beverage cans in the U.S. has not changed since 1996, when can thickness was reduced. Wise has about 15% of the domestic market, whereas Alcan and Alcoa each have about 37% market share. The demands of the packaging and beverage companies in terms of product improvements and quality are high. This has contributed to the exit of many smaller can stock producers over the last decade. Wise's Listerhill facility is a modern and efficient plant, which is technologically capable of rolling lighter gauge can stock. However, future changes to aluminum beverage cans or the manufacturing process could pose a serious risk to Wise given its limited financial resources.

Wise's largest customers are Ball Corporation (rated Ba2) and Crown Cork & Seal (rated B2), which represented 66% and 25% of Wise's revenues in 2003. Can stock sales are governed by supply agreements that specify annual shipment volumes, but actual shipments can vary with customers' output at the plants that Wise supplies. Twice a year, on a six-month trailing average basis, can stock selling prices are adjusted for fluctuating LME aluminum prices. Wise completed the qualification process with Rexam at two of its locations in 2003, shipped a small amount of can stock to them in 1Q04, and hopes to grow this relationship. Wise recently began trial shipments with another North American can manufacturer. Wise also expects to increase sales of food container, trailer roofing, fin stock, and StarBright products.

Wise's financial performance is expected to continue to be constrained by aluminum beverage can market dynamics, notably the oligopolistic nature of the can manufacturing and beverage industries, and by its cost structure. Unlike integrated producers of primary aluminum, which have their own sources of alumina and aluminum and occasionally benefit from high aluminum prices, Wise's profitability generally depends on how well it controls its conversion revenue, the difference between its product prices and the cost of the aluminum it consumes. This has been averaging about $220 million per year and is not likely to change appreciably under established competitive conditions. Labor, energy, supplies, and maintenance parts are Wise's largest conversion costs.

In 2003, decreased can stock shipments, due primarily to the unseasonably cool and wet summer, lowered Wise's net sales to the lowest level in five years. Lower shipments and higher natural gas prices caused a decline in its operating margin in 2003, to 2.0% of sales, compared to 3.6% in 2002 and a five-year high of 4.4% in 2001. For the twelve months ended March 31, 2004, Wise had EBITDA of $39 million, including a $15.2 million LIFO inventory adjustment. On a pro forma basis, Wise's EBITDA to interest will be 2.5 times and the ratio of EBITDA-less-capex to interest will be 1.4 times. Moody's expects Wise's financial results to improve in 2004 over 2003, but its narrow margins may lead to cash shortfalls from time to time.

Aluminum represents Wise's largest cost, roughly two-thirds of cost of sales, but its can stock selling prices adjust for metal costs on a lagged basis. However, unlike Alcan and Alcoa, Wise must purchase primary and scrap aluminum in the open market. In order to reduce its exposure to short-term (six-month) increases in aluminum prices, Wise fixes the cost of aluminum through futures contracts and options. Wise relies on scrap aluminum for a large portion of its raw material requirements, 71% in 2003. Its margins improve when the discount between scrap and primary aluminum increases. The scrap discount is currently very high, around 19 cents per pound. However, the company anticipates that the discount will return to a range of 7 to 15 cents per pound once primary aluminum prices normalize. Scrap purchases from an affiliated company, Wise Recycling, provided 10% of its scrap in 2003.

The SGL-3 speculative grade liquidity rating reflects Moody's expectation that Wise will have modest or even negative free cash flow over the next 12 months, but that its senior secured revolving credit facility will provide it with adequate liquidity. While Wise's net income is expected to increase in 2004, Moody's anticipates that higher shipments and higher selling prices will require greater investment in working capital, which will limit cash generation. Revolver availability at closing is expected to be $50 million, after adjusting for borrowings and letters of credit. Moody's noted that the company's aluminum and natural gas hedging activities often require the posting of initial margin with counterparties, and may require the posting of additional collateral or letters of credit when mark-to-market exposures exceed specified ranges. Wise is expected to remain in compliance with all its debt covenants.

Moody's rated Wise's senior secured notes the same as Wise's senior implied rating since the notes represent a high percentage of the company's total debt. Support for the B2 note rating is also provided by a first priority lien on Wise's fixed assets and a second priority lien, junior to the lien securing the credit facility, on inventory and accounts receivable. The credit facility (unrated) is secured by a first lien on inventory and accounts receivable and a second lien on fixed assets. Wise's pro forma debt will be around $176 million, or 4.5 times LTM EBITDA.

Wise Alloys 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.

Mark Gray

Managing Director

Corporate Finance Group

Moody's Investors Service

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653

Steven Oman

Senior Vice President

Corporate Finance Group

Moody's Investors Service

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653

Mark Gray
Managing Director
Corporate Finance Group

Steven Oman
Senior Vice President
Corporate Finance Group

No Related Data.
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