Tuesday, February 10, 2009

Alcoa Downgraded To Lowest Investment Grade BBB-

AA Shares, meet Anton Chigurh...

Some extracts:
We have concerns regarding the company's liquidity position in light of the current difficult credit environment. Although Alcoa currently has a $3.275 billion revolving credit facility maturing in 2012 and a $1.9 billion 364-day revolving credit facility expiring in October 2009, the $3.275 billion multiyear facility currently supports approximately $1.5 billion of commercial paper borrowings. With significant capital expenditures planned during the first half of 2009, combined with our expectation of reduced earnings due to continued weak end-market demand and lower aluminum prices, borrowings on the $3.275 billion facility could total in excess of $2.5 billion. This would result in total liquidity of less than $3 billion going into 2010, which we believe could also be another challenging year for the company's operations. Moreover, in our view, given the current tight credit markets, the company's ability to roll over its 364-day facility at similar terms and size is uncertain, which could result in a somewhat constrained liquidity position.
Translation: Run...Get to the Chooppaaahhh

And if that didn't convince you, here is their outlook:

The outlook is negative. Although Alcoa has been implementing restructuring and cost savings measures in response to weak market conditions and very low prices, we expect the company to post very weak results in 2009. Moreover, although we expect earnings to improve in 2010 due to somewhat better market conditions and the positive impact from restructuring and cost savings initiatives, we believe credit metrics will remain relatively weak for the 'BBB-' rating during this period, with adjusted debt to EBITDA likely to be above 3.5x and FFO to adjusted debt likely below 20%. A further downgrade would likely result from a continuation of current low prices and weak end-market conditions over the next few years, combined with a constrained liquidity position, such that in our view Alcoa's adjusted debt to EBITDA will rise to more than 4x and remain there and Alcoa's ability to improve FFO to total debt to the 20% area becomes less certain.
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