S&P Changes Alcoa Inc (AA) Outlook To Negative

Updated on

Standard & Poor’s Ratings Services changed its outlook for Alcoa Inc (NYSE:AA) to negative following a plummet on the price of aluminum. The company is the largest aluminum producer in the United States.

S&P Changes Alcoa Inc (AA) Outlook To Negative

According to a statement released by Standard & Poor’s Ratings Services, the cash flow and debt of Alcoa Inc (NYSE:AA) are outside expectations of the rating agency’s BBB- credit rating for the aluminum giant. Alcoa’s credit rating is the lowest investment-grade level.

Gates Cap Management Reduces Risk After Rare Down Year

Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy Read More

In the statement, Standard & Poor’s explained, “We expect the company to continue to post lower-than- anticipated credit measures because of continuing weak aluminum prices. The company’s credit measures will remain weak at least through 2013, reflecting current weak prices, sluggish European demand, and slower-than- expected growth in China thus far this year.”

The three months aluminum delivery in the London Metal Exchange declined by 10 percent over past 12 months due to oversupply of the lightweight metal globally as well as slow growth in China, which is the biggest consumer of aluminum.

Earlier this month, Fitch Ratings upheld its issuer default rating and senior unsecured debt rating for Alcoa Inc (NYSE:AA) at BBB- and a negative outlook. According to Fitch, its BBB- rating for the aluminum giant reflects Alcoa’s leading position in the industry, its strength in low-cost alumina production, and operating flexibility afforded by the scope of its operations.

The rating agency believed that the company’s operating flexibility along with its strong liquidity should offset the possibility of near-term weakness in the aluminum market, citing its addition of new low cost capacity and reduction of high cost capacity. Fitch believed that the surplus in production will continue until 2014, but surplus will shrink and the prices of aluminum will improve from current lows.

The rating agency believed that Alcoa’s earnings and cash flow generation will continue to improve with economic recovery, but it will be constrained this year with prices of metals and weaknesses in Europe. Fitch estimated that Alcoa Inc (NYSE:AA) will achieve at least $2.7 billion EBITDA for fiscal 2013 and generate cash flow after capital expenditures of $1.6 billion this year.

Fitch also explained that its negative outlook for Alcoa Inc (NYSE:AA) reflects the possibility that the company’s EBITDA might miss expectations given the weakness of the aluminum market and the persistence of high financial leverage.

Last December, Moody’s Corporation (NYSE:MCO) Investors Service stated that this will put Alcoa’s $8.6 billion debt under review for downgrade.

Subscribe to ValueWalk!

Get updates on the latest posts and more from ValueWalk straight to your inbox.