Will Alcoa Lose Its Investment Grade Rating? (AA)

Standard & Poor’s Ratings Services has already put GM’s credit ratings on watch today, and the ratings agency is also putting the credit rating of Alcoa, Inc. on "Negative Outlook" from a "Stable" rating.  It has technically affirmed the BBB+ long-term rating and A-2 short-term credit rating.  S&P is citing the weaker than expected earnings, falling aluminum prices, and its weak end markets.  Those factors combined with large capital spending and its halted stock repurchase plan are noted as being weak for the current BBB+ rating.  The revision also reflects uncertainties over the length and depth of the economic downturn, the disruptions in the financial markets, and longer-term effects on commodity prices.

S&P said it expects results to remain weak for at least the nextfew quarters.  It also noted that Alcoa continues to have significantliquidity with about $2 billion available on its $3.275 bankfacilities.  But it also noted that if economic conditions remain weakand prices stay low into 2009, and if the company’s restructuringactions are insufficient to keep its profitability and cash flow fromdeteriorating significantly, then it could lower its debt ratings.

For Alcoa to lose its investment grade rating, S&P would have tocut the rating beyond two notches lower in its credit matrix.  Thatwouldn’t likely come immediately, but the speed of this slowdown in theglobal growth story is happening so fast you have to wonder if S&Pwon’t get overly aggressive.

The research did note actions that would lead to further action oneither side.  S&P could cut Alcoa’ rating if credit measurescontinue to deteriorate and adjusted debt-to-EBITDA approaches 4x or iffunds from operations to adjusted debt falls below 15%.  It said thatAlcoa’s rating could actually go back up to stable if its adjusteddebt-to-EBITDA went below 2.5x and reasonable expectations of fundsfrom operations to adjusted debt were close to 30%.

Alcoa shares have sold down further with the broad-based selling in themarket and shares are now down over 10.5% at $13.16. Its prior 52-weektrading range is $13.40 to $44.77.

Much of this sounds like the Goldman Sachs call downgrading some key steel players this morning.

Jon C. Ogg
October 9, 2008