S&P downgrades Alcoa to one notch above junk
NEW YORK, Feb 10 (Reuters) - Standard & Poor's on Tuesday cut ratings of aluminum maker Alcoa Inc (AA.N) to one notch above "junk" status and said it expects the recession to weigh heavily on performance.
The agency cut the rating by two notches to "BBB-minus" and said the outlook is negative, meaning it could cut again within two years.
The action "reflects our belief that the company's credit metrics will deteriorate significantly during 2009 and, given uncertainties regarding the length and depth of the ongoing economic downturn and our expectations of a long, slow recovery, improvements thereafter will likely result in credit metrics that we would consider to be more consistent with a "BBB-plus," rating," said analyst Marie Shmaruk.
Alcoa shares tumbled 5.8 percent to $8.02.
The cost of protecting its debt against potential default remained at high levels. Five-year credit default swaps were trading at an upfront cost of about 9.7 percent, or $970,000 annually to insure $10 million of debt for five years, in addition to annual payments of $500,000.
Swaps trade on an upfront basis when sellers of protection fear the risk of default is rising and want to be paid more at the outset of the contract.
S&P said even if aluminum prices recover to the 85 cents a pound level in 2010 from their current level of 65 cents a pound, Alcoa's adjusted debt to EBITDA ratio will remain above 3.5 times and funds from operations will remain below 20 percent.
Alcoa is big enough to adjust to market conditions, but an aggressive financial policy and capital spending measures in the last few years have saddled the company with high debt levels entering the recession.
"In addition, we have concerns regarding the company's liquidity position in light of the current difficult credit environment," said Shmaruk. (Reporting by Ciara Linnane; Editing by Dan Grebler)
