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US CREDIT-Alcoa debt faces new weakness as ratings weigh

 NEW YORK, Jan 13 (Reuters) - Bonds of Alcoa Inc AA.N,
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.
 RATINGS RISKS
 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 FCX.N.
 Freeport's credit default swaps traded at 827 basis points
on Tuesday, according to Markit Intraday.
 (Editing by Chizu Nomiyama)















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