Moody's downgrades Noranda's loan rating
Global rating agency Moody's has downgraded the senior secured term loan rating of Noranda Aluminum Acquisition Corporation to B1 from Ba3. At the same time, Moody's affirmed all other ratings of Noranda, including the company's B2 Corporate Family Rating, B2-PD Probability of Default Rating and Caa1 rating on the company's senior unsecured notes. The SGL-3 Speculative Grade Liquidity Rating remains unchanged. The outlook is negative.
The downgrade in the senior secured term loan rating to B1 reflects the $110 million add on to the term loan (increasing the term loan to approximately $430 million) versus the originally intended $60 million increase and the commensurate reduction in proceeds from the company's unsecured note issue.
Consequently, under Moody's Loss Given Default Methodology, the shift in the level of secured versus unsecured debt in the capital structure results in less underlying loss absorption to the secured debt. Proceeds from the term loan and the note issue will be used to tender for and repay outstanding balances under the $275 million in floating rate global notes due May 2015.
Noranda's B2 Corporate Family Rating reflects the company's strong relationships with its customer base and good position within markets served. Additionally, continued focus on cost control and cost reduction under its " Cost- Out, Reliability and Effectiveness"( CORE) program, as well as the benefits to its overall cost position from its alumina refinery and bauxite operations are expected to continue to provide some mitigation to the volatility of aluminum prices and input costs.
These latter benefits are derived from the earnings generated by third party sales of both excess bauxite and aluminum, which the company views as a reduction to overall production costs in its primary aluminum operations.
At the same time, the rating reflects Noranda's relatively small size, its earnings leverage to performance of the primary metal business, fundamental challenges in the aluminum markets, and the reliance of this business on a single smelter and refinery - which leaves the company exposed to any future disruptions at the New Madrid, Missouri smelter and Gramercy, Louisiana refinery. While the downstream operations add a level of relative stability, their EBITDA contribution is still likely to remain small relative to the more commodity-like primary aluminum and alumina seg- ments, absent a significant increase in production capacity. The upstream primary operations will remain the dominant earnings driver and will continue to reflect the cyclicality of the aluminum price and demand levels. The rating also reflects the company's exposure to volatility in the cost of key inputs such as energy and caustic soda.
We believe that meaningful improvement in the company's credit metrics will likely be impeded by continued weakness in the global aluminum markets within the foreseeable time horizon as a result of lingering global economic uncertainty and sluggish demand. Moreover, while aluminum prices remain weak, the company continues to be exposed to volatility in the costs of key inputs such as energy and caustic soda. Consequently, we expect debt protection metrics such as debt-to-EBITDA to trend at or slightly above 5.5 times while EBIT- to- interest to average around 1.0 times within the next 12 to 18 months.
The SGL-3 speculative grade liquidity rating reflects our expectations for reduced EBITDA and cash flow, leading to higher borrowings under the company's revolver (ABL) in the next 12 months. Furthermore, it is unlikely that the company will scale back capital expenditures in the near term as the company must invest in improving the reliability of its operations given its reliance on both a single- location smelter and refinery. As a result, we believe that Noranda will generate negative free cash flow ( cash from operations less capital expenditures and dividends) during the forecast period.