Kaiser Aluminum Sr Notes Cut To B2 From B1:
Moody's
Updated: Tuesday, December 19, 2000 11:20 AM ET
New York, December 19, 2000 -- Moody's Investors Service completed a thorough review of Kaiser Aluminum & Chemical Corporation in the wake of Kaiser's third-quarter charge for an increase in its net asbestos liability and its recent announcements regarding production curtailments and related power sales at its Pacific Northwest operations. The outcome of this review is the confirmation of Kaiser's B1 senior implied rating. However, for reasons noted below, Moody's decided to lower, to B2 from B1, its rating on the $225 million of 9.875% senior notes due 2002, and $225 million of 10.875% senior notes due 2006, and also lowered Kaiser's senior unsecured issuer rating to B2 from B1. Moody's also lowered its rating on Kaiser's $400 million of 12.75% senior subordinated notes due 2003, to Caa1 from B3, and lowered the preferred stock rating of Kaiser's parent, Kaiser Aluminum Corporation (KLU, news, msgs), to (P, news, msgs)"caa" from (P, news, msgs)"b3". The outlook for all ratings was changed to negative from stable.
Growing uncertainty over the size of Kaiser's asbestos liability and the adequacy of its insurance coverage played an indirect role in the downward revision of Kaiser's senior unsecured and subordinated debt ratings. Kaiser's asbestos exposure appears to be more manageable than that of other well-publicized companies. Nevertheless, Moody's believes the inherent uncertainty surrounding the asbestos liability, coupled with Kaiser's high leverage, vulnerability to volatile aluminum prices, and fairly high operating risk, may adversely impact its ability to refinance its $325 million secured credit agreement, $225 million of senior notes, and $400 million of senior subordinated notes prior to their maturity in August 2001, February 2002, and February 2003, respectively. Other companies' experiences dealing with asbestos-related liabilities have made the credit markets extremely wary of borrowers with asbestos exposure.
Historically, Kaiser has borrowed very little from its secured credit facility. However, Moody's believes that it is quite likely that any refinancing will require Kaiser to rely more heavily on secured debt, thereby subordinating whatever senior and senior subordinated notes that remain outstanding after a recapitalization to considerably more secured debt.
Kaiser's announcements regarding a temporary curtailment of an additional 90,000 metric tonnes per year of Pacific Northwest smelter capacity, the sale of electrical power for the months of December and January for net proceeds of $88 million, and the potential for additional power sales, helps offset some of the fundamental business and refinancing risk at Kaiser. However, a number of factors could lessen the financial benefits associated with the power sales. Some of these factors include a possible impairment charge against the smelters' book value, which could erase all of Kaiser's existing equity; accelerated closure costs in the event the smelters are never reopened; uncertainty over how the proceeds from power sales will be used; and the possibility that additional power sales will be forestalled by legal or political developments. Moody's will maintain its negative rating outlook until these matters are clarified.
In a related action, Moody's lowered its rating for the $119 million of 12% guaranteed senior secured notes, due 2003, of MAXXAM Group Holdings Inc. (MGHI, news, msgs), to Caa1 from B3. MGHI is a holding company that owns 35% of Kaiser Aluminum Corporation and 100% of MAXXAM Group Inc. (MGI, news, msgs), a forest products company whose primary subsidiaries are Pacific Lumber Company and Britt Lumber Co., Inc. The downgrade of the MGHI notes reflects Kaiser's and MGI's high degree of operating and financial leverage, and the uncertain ability of these entities to upstream dividends to MGHI. The MGHI notes are secured by approximately 26 million shares of KLU shares and the common stock of MGI. As of September 30, 2000, MGHI had cash and marketable securities of $52 million and MGI had unrestricted cash of approximately $40 million. However, lower than expected timber harvest at Pacific Lumber has required it to draw from its credit agreement and could consume some of MGI's cash.
In the third quarter of 2000, Kaiser took a $43 million charge for asbestos-related claims, net of expected insurance recoveries. The company noted that the charge was based on recent cost and other trends experienced by Kaiser and other companies. Like many other companies burdened with asbestos liabilities, Kaiser has experienced an increase in the number of claims and estimated settlement payments. Between December 1998 and September 30, 2000, Kaiser's pending asbestos claims have risen from 86,000 to 115,000 and its estimated gross liability for asbestos-related costs increased about three-fold, from $186 million to $539 million. While Kaiser's asbestos insurance coverage appears to be much stronger than other companies' (Kaiser has recorded an estimated insurance receivable of $428 million as of September 30), Moody's believes that uncertainty regarding asbestos litigation and insurance recoveries, together with Kaiser's high leverage and weak operating performance, will limit Kaiser's ability to refinance its maturing notes in the current credit market.
Moody's reiterated the business risk associated with Kaiser's aluminum operations and the variability of its cash flow. Lower aluminum prices, higher power costs, operating problems, and reduced demand for alumina, primary aluminum, and fabricated aluminum products could negatively impact Kaiser's operating cash flow and strain its financial resources. Some of these risks seem more potent today, given the less robust state of the US economy, weakness in transportation and aerospace end-user markets, and, beginning in October 2001, a reduction in the power being provided, at higher rates, by the Bonneville Power Administration to Kaiser's smelters and rolling mill in Washington.
On September 30, 2000, Kaiser had $960 million of debt and $72 million of book equity (its market value of equity was approximately $380 million on December 18). It is difficult to determine a run-rate EBITDA figure for Kaiser due to the effect of asset sales and restructuring initiatives; the two year USWA dispute, which was settled in September; the large number of unusual and non-recurring items that Kaiser has recorded this year; and the impact that higher power costs and the rebuild of the Gramercy alumina refinery will have going forward. However, EBITDA to interest was 1.8x based on reported results for the first nine months of 2000. Over this period the LME aluminum price was $0.71 per pound, and is currently $0.72. A significant proportion of Kaiser's 2001 alumina and primary metal production is subject to forward sales and option contracts that set a minimum aluminum price of around $0.67 per pound.
Kaiser Aluminum & Chemical Corporation is a wholly-owned operating subsidiary of Kaiser Aluminum Corporation (KLU, news, msgs), which is a subsidiary of MAXXAM Group Holdings Inc. (MGHI, news, msgs) and MAXXAM Inc., which together own 63% of KLU's common stock. Kaiser and MGHI are headquartered in Houston, Texas.