Alcoa Inc (NYSE:AA)’s credit rating has been downgraded to one-notch below investment grade by Moody’s Investors Service due to tough market conditions and falling prices. Low metal prices have badly hurt Alcoa Inc (NYSE:AA), especially its upstream business, according to Reuters. The largest U.S. aluminum producer said in a statement that the rating downgrade reflects volatility in metal prices and macroeconomic conditions, rather than the New York-based company’s operating and financial strength.

Alcoa

Falling Prices Overshadow Alcoa’s Restructuring

Moody’s cut Alcoa Inc (NYSE:AA)’s rating from Ba1 from Baa3. But the outlook remains stable, indicating that the agency is unlikely to downgrade the company again soon. Moody’s said yesterday that Alcoa has boosted productivity, reduced costs, shuttered high-cost smelting capacity and expanded profitable businesses, but falling aluminum prices have taken a toll on the company. Prices have fallen due to increasing global production and a slowdown in key metal consumer economies like China.

Over the past few quarters, the company’s engineered products division, which manufactures aircraft parts, wheels and other goods, has generated more profits than the upstream business which mines bauxite and refines it into alumina to produce aluminum. So, analysts speculate that the company may offload some parts of its upstream operations.

After the rating downgrade, prices of Alcoa Inc (NYSE:AA) bonds declined in the market. The 5.4 percent notes due to mature in 2021 plunged 0.6 percent to 103.4 cents. They mostly trade above the face value.

How Alcoa Can Regain Investment Grade Rating

Over the past five years, metal has been the third worst performer on the UBS Bloomberg CMCI index, giving a 47 percent negative return. Moody’s said that the company needs to lower its debts by $2.8 billion to meet the investment grade criteria with $3 billion EBITDA. The aluminum producer is expected to $2.71 billion of EBITDA in 2013.

S&P has already reduced its outlook for Alcoa Inc (NYSE:AA) to negative from stable with BBB- rating in April. Fitch Ratings, which has a BBB- rating on Alcoa Inc (NYSE:AA)’s senior unsecured debts, has also reduced its outlook to negative.

Alcoa Inc (NYSE:AA) shares were down 0.82 percent to $8.51 at 1:05 PM EDT.