Aluminum Outlook Changes

Aluminum Outlook Changes

October 10, 2001
Steven Oman

Moody's Investors Service changed its rating outlook for several high-yield aluminum companies to negative from stable. Moody's also lowered its ratings for Kaiser Aluminum & Chemical Corporation (Kaiser) and will keep Kaiser's ratings under review for possible further downgrade. A negative rating outlook now applies to Century Aluminum Company, Golden Northwest Aluminum, Inc., and Ormet Corporation. The negative outlooks reflect rating pressure being exerted by low and falling aluminum prices, potentially lower shipments, and the derivative impact this could have on each firm's liquidity. All four companies will be hurt by weaker fundamentals for aluminum brought about by the slowing global economy. In addition to this broad-based impact, Kaiser is expected to be impacted by lower demand for heat-treated aluminum from the commercial aerospace industry and the continued shuttering of its Pacific Northwest smelters. Uncertainties related to Kaiser's debt refinancing plans and its asbestos liability are further reasons for placing the company on review for possible downgrade.

The following ratings of Kaiser were downgraded and placed under review for possible further downgrade. its $208 million of 9.875% senior notes due 2002, to B3 from B2, its $225 million of 10.875% senior notes due 2006, to B3 from B2, its $400 million of 12.75% senior subordinated notes due 2003, to Caa2 from Caa1, its senior implied rating, to B2 from B1, its senior unsecured issuer rating, to B3 from B2, and the preferred stock rating for Kaiser's parent, Kaiser Aluminum Corporation, to (P)Ca from (P)Caa3.

Moody's review of Kaiser will focus on its refinancing plans, prospective financial performance and financial flexibility, and the probable magnitude of its asbestos liability net of insurance recoveries.

Moody's change to a negative rating outlook applies to the following companies and their respective ratings. Century Aluminum Company (Century) the Ba2 rating for Century's $100 million senior secured revolving credit facility, the Ba3 rating for its $315 million of 11.75% guaranteed first mortgage notes due 2008, its Ba3 senior implied rating, and its B2 senior unsecured issuer rating.

Golden Northwest Aluminum, Inc. (Golden Northwest)
the B2 rating for Golden Northwest's $75 million senior secured revolving credit facility, the B3 rating for its $150 million of 12% guaranteed first mortgage notes due 2006, its B3 senior implied rating, and its Caa1 senior unsecured issuer rating.

Ormet Corporation
the B1 rating for Ormet's $100 million senior secured revolving credit facility, the B3 rating for its $150 million of 11% guaranteed senior secured notes due 2008, the B3 rating for its $75 million guaranteed senior secured floating rate term loan due 2008, its B2 senior implied rating, and its Caa1 senior unsecured issuer rating.

Aluminum prices have declined 26% since the end of January and are currently around 59 cents per pound. For most of the year, it was felt that aluminum would be less affected by the softer economy than other metals, as smelter shut-downs in the Pacific Northwest and Brazil were helping offset the impact of weaker demand and modest additions of new industry capacity elsewhere. However, these hopes were thwarted by the impact on the US and worldwide economies of the tragic events of September 11. During September, aluminum stocks on the LME increased 5% and the LME cash price fell 3 cents.

Demand for all end uses of aluminum, including transportation, construction, and packaging, will be affected by the weaker economy, but commercial aerospace applications, which are high-margin products, are likely to be hurt the most. Of the four aluminum companies covered by this rating action, only Kaiser has exposure to the aerospace industry, through its flat-rolled products mill in Trentwood, Washington.

Recent aluminum prices are below all four companies' cash costs. However, all the companies hedge a portion of their production, so have some near-term protection from lower prices. For Kaiser and Golden Northwest, costly smelter curtailments will continue due to low prices and high power costs. Century Aluminum and Ormet do not have operations in the Northwest so are not affected by the West Coast's power problems.

Maintaining financial flexibility is imperative for commodity producers, and most of the companies entered this downturn in reasonably good shape. However, Kaiser needs to put together a comprehensive recapitalization package that addresses several issues: a re-do or extension of its secured bank credit facility, which matured in August but for which Kaiser was granted an extension to November 2, the looming maturity of its 9.875% notes, which are due February 2002, as well as its 12.75% senior subordinated notes, due February 2003. Kaiser currently has the funds to retire the 9.875% notes. These funds have come largely from power sales and after-tax proceeds from its sale of an 8.3%% interest in Queensland Alumina Limited. Nevertheless, it needs to resolve maturity issues and finalize a long-term committed credit facility.

A final challenge for Kaiser is its asbestos exposure. The company increased its asbestos reserve in 2Q01, raising the liability, net of expected insurance recoveries, by $67.5 million. At June 30, the gross liability was $650 million and the insurance receivable was $505 million. Like many other companies burdened with asbestos liabilities, Kaiser has experienced an increase in the number of claims and estimated settlement payments. Kaiser still expects its insurance coverage to cover approximately 75% of asbestos defendant's claims. Moody's review will examine Kaiser's asbestos liability. The inadequacy of U.S. tort laws to deal with asbestos claims and the bankruptcy filings on the part of many larger companies with asbestos exposure make Kaiser a more likely target of lawsuits.

A favorable development for Kaiser is the progress it is making toward a 100% operating rate at its Gramercy, Louisiana alumina refinery. The company had previously stated that it believed the combination of lower production costs and higher volumes at Gramercy could add an incremental $50 to $75 million of operating income in 2002 relative to recent performance levels, although continued weakness in metal prices would moderate that benefit.

Kaiser Aluminum & Chemical Corporation, a wholly-owned operating subsidiary of Kaiser Aluminum Corporation, is headquartered in Houston, Texas.

Century Aluminum Company is a primary aluminum producer with ownership interests in three US aluminum reduction plants, representing 465,000 tonnes of annual capacity. Its headquarters are in Monterey, California.

Golden Northwest Aluminum, Inc. produces primary aluminum and value-added aluminum products from two locations along the Columbia River and has its headquarters in The Dalles, Oregon.

Ormet Corporation is an integrated producer of alumina, primary aluminum, and fabricated aluminum products with operations in the US and headquarters in Wheeling, West Virginia.