Will Alcoa Lose Its Investment Grade Rating? (AA)

By Douglas A. McIntyre Updated Apr 28, 10:28AM EDT · Published Oct 9, 2:45PM EDT

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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

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.