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Rating Action:

Moody's downgrades Novelis' ratings (CFR to B1), assigns new ratings; outlook stable

06 Dec 2010

Approximately $4 billion of rated debt securities affected

New York, December 06, 2010 -- Moody's Investors Service downgraded the corporate family and probability of default ratings of Novelis Inc. (Novelis) to B1 from Ba3. At the same time, Moody's assigned a Ba2 rating to the new $1.5 billion secured term loan and a B2 rating to the new up to $2.5 billion senior notes being issued. Moody's also downgraded the rating on the currently outstanding senior notes due 2015 to B2 from B1. Should these notes be tendered in full, Moody's will withdraw this rating. Moody's understands that the amount of funds being raised in total will not exceed $4 billion. Moody's intends to withdraw the ratings on Novelis' and Novelis Corporation's existing term loans as they will be repaid with proceeds of the new term loan and note issue. The rating outlook is stable. This rating action concludes the review that was initiated on November 30, 2010.

RATINGS RATIONALE

The downgrade results from the company's restructuring of its balance sheet, which includes raising $4 billion in new debt, the proceeds of which will be used to refinance approximately $2.5 billion of existing debt and to fund a distribution of $1.7 billion to its ultimate parent company, Hindalco Industries Limited. The B1 corporate family rating incorporates the more highly leveraged profile following this recapitalization as measured by both the debt to EBITDA and debt to capitalization ratios. Pro-forma for the transaction, we expect these ratios to increase to greater than 4x and 80% respectively, as compared with the September 30, 2010, position of 2.9x and 50.1%, respectively. In addition, the $1.7 billion distribution to Hindalco significantly reduces the company's book equity base and eliminates its tangible equity cushion given the high level of intangibles and goodwill. The rating also considers Novelis' continued sensitivity to sustainable recovery in the segments of its business that are not related to the can sheet market.

Novelis' B1 corporate family rating acknowledges the company's large scale, significant market position, and global footprint in the aluminum rolled products market, including its dominant market position in the relatively stable beverage and food can sheet and good positions in industrial, transportation, and foil and packaging. As of January 1, 2010, the company no longer had contracts with price ceilings, which had led to losses over prior years as market-based aluminum prices exceeded certain levels. We believe that this fundamental change will result in greater stability and enhanced margins going forward.

At the same time, the B1 rating reflects the variability of Novelis' sales to the construction and automotive end markets, the sensitivity of its earnings to volume levels given the level of fixed costs, and its low return on assets. In addition, the company's balance sheet recapitalization will result in the company running with higher levels of leverage (as measured by debt to EBITDA and debt to capitalization) in the medium term.

The stable outlook reflects Moody's belief that Novelis has raised its base level of earnings and cash flow to a higher level, from which it will be able to consistently record metrics appropriate for B1 rating. The company's liquidity is very good and it should be able to build up cash even with increased working capital needs and capital expenditures.

The rating and/or outlook could be pressured should the company experience sustained volume and margin declines, debt/EBITDA of greater than 5x, EBIT/interest of less than 2x, or persistently negative free cash flow. A significant contraction in liquidity or availability under the ABL could also negatively affect the rating or outlook.

An upgrade is unlikely at this time due to the company's more leveraged profile following the balance sheet recapitalization. However, a future upgrade would require either a permanent improvement in conversion margins and operating profits or a reduction in Novelis' absolute levels of debt such that debt/EBITDA would drop below 3.5x on a sustainable basis. Other indicators of an upgrade would be an EBIT margin at or above 5% and free cash flow to debt of at least 4% over the cycle.

The principal methodologies used in this rating were Global Steel Industry published in January 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Headquartered in Atlanta, Georgia, Novelis is the world's largest producer of aluminum rolled products, with operations in North and South America, Europe and Asia. During the 12 months ended September 30, 2010, Novelis generated approximately $9.6 billion of revenues and shipped approximately 2.8 million tonnes of rolled aluminum.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Carol Cowan
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's downgrades Novelis' ratings (CFR to B1), assigns new ratings; outlook stable
No Related Data.
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