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Rating Action:

Moody's downgrades Alcoa's ratings, assigns Ba1 CFR; outlook stable

Global Credit Research - 29 May 2013

Approximately $8.6 billion of debt downgraded

NOTE: On June 26, 2013, the press release was revised as follows: In the debt list, corrected ratings on the Multiple Seniority Shelf Feb 17, 2014 and Senior Unsecured Medium-Term Note Program to (P)Ba1 from (P)Ba1 LGD4, 54%. Revised release follows.

New York, May 29, 2013 -- Moody's Investors Service downgraded the senior unsecured debt ratings of Alcoa Inc. ("Alcoa") to Ba1 from Baa3 and assigned a Ba1 Corporate Family Rating and a Ba1-PD Probability of Default Rating. Moody's confirmed the Ba2 preferred stock rating. At the same time, Moody's withdrew the company's Prime-3 commercial paper rating and assigned a Speculative Grade Liquidity Rating of SGL-1. This concludes the review for downgrade initiated on December 18, 2012. The rating outlook is stable.

Downgrades:

..Issuer: Alcoa Inc.

....Multiple Seniority Shelf Feb 17, 2014, Downgraded to (P)Ba1 from (P)Baa3

....Senior Unsecured Conv./Exch. Bond/Debenture Mar 15, 2014, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Ba1 from (P)Baa3

....Senior Unsecured Regular Bond/Debenture Jan 15, 2028, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Jun 15, 2018, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Feb 1, 2027, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Feb 23, 2019, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Feb 23, 2022, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Feb 1, 2017, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Feb 1, 2037, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Jul 15, 2013, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Jul 15, 2018, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Aug 15, 2020, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Apr 15, 2021, Downgraded to Ba1 LGD4, 54% from Baa3

..Issuer: Chelan County Development Corporation, WA

....Senior Unsecured Revenue Bonds Dec 1, 2031, Downgraded to Ba1 LGD4, 54% from Baa3

..Issuer: Iowa Finance Authority

....Senior Unsecured Revenue Bonds Aug 1, 2042, Downgraded to Ba1 LGD4, 54% from Baa3

Assignments:

..Issuer: Alcoa Inc.

.... Corporate Family Rating, Assigned Ba1

.... Probability of Default Rating, Assigned Ba1-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-1

Outlook Actions:

..Issuer: Alcoa Inc.

....Outlook, Changed To Stable From Rating Under Review

Confirmations:

..Issuer: Alcoa Inc.

....Pref. Stock Preferred Stock, Confirmed at Ba2, LGD6, 97%

Withdrawals:

..Issuer: Alcoa Inc.

.... Commercial Paper, Withdrawn , previously rated P-3

....Senior Unsecured Commercial Paper, Withdrawn , previously rated P-3

The downgrade to a Ba1 Corporate Family Rating reflects our expectations that, despite Alcoa's success in reducing costs and improving productivity, continued headwinds pressuring fundamentals in the aluminum industry and aluminum prices , and most specifically the level of performance improvement that can be achieved in the primary segment, will continue to push out the time frame in which debt protection metrics appropriate for an investment grade rating can be achieved. We believe this is likely to continue through 2013 and 2014. Key debt protection metrics such as Ebit/interest and debt/EBITDA at 1.2x and 5.3x respectively for the twelve months through March 31, 2013 remain weak for an investment grade rating as does the (operating cash flow less dividends)/debt ratio of 13.7%. While the company's efforts to improve performance in its alumina and aluminum business are evidencing a degree of success, the full improvement to targeted levels in terms of moving down the cost curve is expected to be achieved by 2015. In addition, although aluminum demand has evidenced year-on-year improvement of approximately 7% to 7.5 % from 2010 through 2012, the aluminum price has been in a downward decline since reaching post recession highs in 2011. Currently LME aluminum prices are ranging in the low $0.80/lb and there appears little catalyst for upward movement.

Chinese growth is slowing as evidenced by its first quarter 2013 GDP growth of 7.7% and more recent flash reports of further slowing while the PMI index in the US is evidencing a weakening trend and much of Europe remains in recession. While pockets of strength are evidenced, most notably in the automotive and aerospace industries, these are not viewed sufficient for a broad based global recovery in the aluminum industry and significant profitability recovery. Although Alcoa's mid stream business (Global Rolled Products) is expected to show improvement and its downstream Engineered Products and Solutions (EPS) business is well positioned, these segments are currently not able to offset the slow profit improvement in the primary business at current debt levels. At adjusted debt levels of approximately $13.3 billion, pro-forma for the repayment of the July 2013 debt maturity, EBITDA needs to reach a run rate of approximately $3.8 billion inorder to achieve more reasonable metrics. Conversely, at a $3 billion EBITDA level, debt would need to reduce by approximately $2.8 billion.

While the company is evidencing success in slightly improving performance at lower price points, given industry dynamics we believe the achievement of metrics appropriate for an investment grade rating remains beyond the rating horizon. We expect leverage, as measured by the debt/EBITDA to remain elevated in 2013 and 2014 and EBIT/interest to remain below 2x during this same time period although evidencing a gradual but improving trend.

RATINGS RATIONALE

Alcoa's rating considers its position as one of the largest integrated aluminum producers globally, holding a commanding position in the alumina industry, a leading position as a provider of primary aluminum, and important positions in a wide variety of markets served by its midstream (Global Rolled Products - GRP) and downstream (EPS) segments. Factored into the rating is the focus the company continues to maintain on cost reduction and cost control, as well as working capital management and productivity, particularly in the smelting system. The rating also reflects current challenges in both the alumina and aluminum markets where prices continue to trend below 2012 levels and global overcapacity remains. While various companies in the industry have announced smelter capacity curtailment or are reviewing smelter curtailments, including Alcoa, there remains a significant amount of lower cost capacity targeted to come on stream for a net increase in capacity over the next several years. In addition, inventory levels on the LME remain high and we expect that, at some point, this metal will find its way to the market. These factors are incorporated in the rating.

Although we expect cost creep in various input costs such as energy and caustic soda, a significant portion of savings achieved in recent years, particularly in the smelting system, is believed sustainable, better positioning the company for improvement in earnings and cash flow generation over the medium term. However, recovery in the aluminum industry remains slow and uneven, including in the U.S., which typically accounts for at least 50% of Alcoa's revenues. Improved volumes and prices are necessary for sustainable strengthening in performance and stronger metrics.

The company's excellent liquidity and manageable near-term debt maturities are also important considerations in the rating.

The senior unsecured ratings are at the corporate family rating reflecting the absence of secured debt in the capital structure. If this were to change the unsecured ratings could be adversely impacted.

The stable outlook reflects our expectation for relatively weak aluminum prices over the next twelve to eighteen months and gradual performance in Alcoa's debt protection metrics. The outlook also captures the company's focus on driving down costs, managing working capital, sound liquidity position and manageable debt maturities.

The rating could be upgraded should Alcoa achieve a sustainable debt/EBITDA ratio of at least 3.5x, a sustainable EBIT/interest ratio of at least 4x and a sustainable (Cash flow less dividends)/debt ratio of at least 20%.

The rating could be downgraded should debt protection metrics trend below current levels or liquidity contract materially.

The principal methodology used in this rating was the Global Mining Industry Methodology published in May 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in New York City, New York, Alcoa is a leading global integrated aluminum producer active in all major aspects of the industry, including the mining of bauxite, refining into alumina, smelting and recycling. Through its Global Rolled Products and Engineered Products and Solutions segments, the company provides value added products to a diversity of end markets. Revenues for the twelve months through March 31, 2013 were approximately$23.5 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carol Cowan
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Alcoa's ratings, assigns Ba1 CFR; outlook stable
No Related Data.

 

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