NEW YORK, Jan 13 (Reuters) - Bonds of Alcoa Inc, which on Monday reported its first quarterly net loss in six years, may deteriorate further from their near-record weakness as the company's debt load continues to rise and potential credit rating downgrades weigh.
The aluminum producer, which is slashing 15,000 jobs, blamed a decline in metal prices and charges associated with curtailing production, reducing costs and streamlining its portfolio for its larger-than-expected $1.19 billion net loss. For details, see [ID:nN12355902].
The cost to insure Alcoa's debt with credit default swaps jumped to 737 basis points, or $737,000 per year to insure $10 million in debt for five years, on Tuesday, from 608 basis points before the news, according to data by Markit Intraday.
The swaps have deteriorated from around 400 basis points in early November, and 130 basis points last August, Markit data shows.
"The company continues to outspend cash flow, sits relatively high on the cost curve, pays a large dividend, and faces an uncertain demand environment in 2009, which may require further capacity closures," Barclays Capital analyst Harry Mateer said in a report.
Alcoa is suffering from declining demand and falling prices of aluminum while it continues to make high capital expenditures and dividend payments.
The company generated $608 million in operating cash flow for the quarter, and spent $136 million on dividends and more than $1 billion on capital expenditures, JPMorgan analysts Robin Levine and Svetlana Goldenberg said in a report.
The company increased its debt in the fourth quarter by $450 million to fund its spending deficit, bringing the company's total debt to $10.6 billion as of year-end, they added.
Alcoa said last week it plans to reduce capital spending by 50 percent in 2009 to $1.8 billion.
"Given the bleak outlook for aluminum in the short-term and Alcoa's exposure to the developed regions, profitability will likely remain under pressure despite some easing of input costs," CreditSights analysts Andrew Brady and Eugene Wang said in a report.
"As a result, further deterioration in credit metrics are expected and free cash flow will likely remain constrained," they said.
JPMorgan, CreditSights and Barclays all have an "underweight" recommendation on Alcoa's debt.
"We expect Alcoa's credit metrics to deteriorate significantly throughout 2009," Barclays said.
As its credit quality declines, Alcoa may be downgraded into the low "BBB" area, the lowest investment grade, said Barclays' Mateer.
Standard & Poor's and Moody's Investors Service have Alcoa's senior unsecured debt on review for downgrade from "BBB-plus" and "Baa1" respectively, both the third lowest investment grade.
Fitch Ratings cut Alcoa to "BBB," from "BBB-plus," in October, citing concern over the company's rising debt levels.
Alcoa's commercial paper is also on review by S&P and Moody's, and a downgrade would dry up demand for the paper. Without access to the commercial paper market the company would need to draw more from its bank credit facilities, analysts said.
"If Alcoa loses its A2/P2 commercial paper ratings this year, it will lose access to this market and will have to draw on its bank facilities," JPMorgan said.
Alcoa had $3.8 billion in undrawn credit facilities from committed lines of $5.2 billion as of year end, and $1.4 billion of commercial paper outstanding, the bank said.
Weakness in Alcoa's credit default swaps is also likely to continue, with Barclays viewing the company's CDS as likely to trade in line, or wider, than CDS on metals company Freeport-McMoRan Copper & Gold Inc.
Freeport's credit default swaps traded at 827 basis points on Tuesday, according to Markit Intraday.
(Editing by Chizu Nomiyama)
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