Aluminum price boosts Alcoa ratings

Trade activity this week showed that Alcoa with its credit rating one step away from junk levels is winning over bond investors by extending its debt maturities and increasing revenue as aluminum prices soar.

According to data, the largest US producer of the lightweight metal sold USD 1.25 billion of 10 year after boosting the size of the deal from USD 750 million. Standard & Poor’s which rates the company BBB raised its outlook to neutral from negative this week following similar moves by Moody’s Investors Service and Fitch Ratings.

Mr Klaus Kleinfeld CEO of Alcoa said that Bondholders speculate that rising aluminum prices will help Alcoa bolster its creditworthiness even after its Q1 sales rose less than analysts forecast. Demand for the metal may climb 12% this year as vehicle and aircraft makers increase production.

Mr said Jodie Lurie corporate credit analyst at Janney Montgomery Scott said that "They’re are on more stable footing than they’ve been over the past few years. They’ve definitely taken the proper steps over the past year to reduce their leverage and cut their costs."

Alcoa said that proceeds from the 5,4% bonds will be used to finance a tender offer for as much as USD 400 million of the company’s 6% notes due in July 2013 and as much as all of its USD 552.9 million of 5,375% debentures maturing in January 2013.

Bloomberg data showed that Alcoa which is based in Pennsylvania sold the new bonds at a yield of 1.95percentage points more than similar maturity treasuries. Bank of America Merrill Lynch index data showed that compares with the 185 basis point average spread on bonds in the BBB tier. In its previous debt sale on July 26, Alcoa issued USD 1 billion of 10 year notes that paid 318 basis point spread, 73 basis points wider than the 245 average at the time.

Alcoa faces annual interest payments of USD 67.5 million of its 5,4% bonds sold yesterday, USD 20,8 million less a year than on the same amount of debt with a coupon of 7,06%, the average yield on junk bonds in the BB tier. Moody’s which ranks Alcoa Baa3, equivalent to S&P’s rating, raised its outlook to stable from negative in March. Fitch which grades the company BBB lifted its assessment in February.