S&P: Alumina Ltd. Remains On Negative Outlook Following Amendments To AWAC Agreement; 'BBB-' Rating Affirmed
"Alumina remains on negative outlook because of material changes in the agreements that will govern its joint venture with Alcoa World Alumina and Chemicals (AWAC) and the potential leveraging at the AWAC operating asset level, which would allow distributions to be structurally subordinated," said S&P Global Ratings credit analyst Sam Heffernan. "In addition, the creditworthiness of the new joint-venture partner, Alcoa Corp., following its demerger from Alcoa Inc., remains uncertain."
Nevertheless, the changes would provide greater certainty of cash flows from distributions, and increase Alumina's influence over operations through a wider scope requiring a super-majority vote.
Alumina's business risk profile reflects our view that AWAC's good business position as the world's largest alumina producer provides AWAC with the size and scope to adjust its operations to respond to market conditions. Tempering these strengths is Alumina's minority shareholding in AWAC and Alumina's critical dependence on the distributions it receives from AWAC. Alumina's joint-venture partner is the majority owner and operator of the assets and as such, represents counterparty risk for Alumina, in our view.
Alumina is a minority (40%) stakeholder in AWAC. Although AWAC has a track record of maintaining a high dividend payout, low alumina and aluminum prices could strain AWAC's ability to distribute a dividend to Alumina that would support Alumina's financial metrics being consistent with our expectations for the 'BBB-' rating.
The negative outlook on Alumina reflects our view of the potentially negative impact of structurally subordinated distributions if AWAC were to raise debt funding. In addition, the creditworthiness of Alumina's new joint-venture partner, Alcoa Corp., is uncertain, pending greater clarity of risks and mitigants after the latter's demerger from Alcoa Inc. by the end of 2016.
Mr. Heffernan added: "We would lower the rating on Alumina if the greater certainty in distributions under the new joint-venture agreement did not offset any structural subordination of cash flows due to debt funding at AWAC."
In addition, any deterioration in Alumina's joint-venture partner Alcoa Corp. could place downward pressure on the rating because of counterparty risk. Apart from being the operator of AWAC, Alcoa Corp. will also be AWAC's largest customer.
Although less likely over the next 12 months, we would lower the ratings if we forecast Alumina's financial profile would weaken significantly because of persistently depressed alumina prices. Such deterioration could occur if the company's funds from operations (FFO) to debt is less than 45% and its FFO cash interest coverage is less than 9x by the year ending June 30, 2017. This scenario would likely occur if alumina prices returned to below US$200 per ton for a prolonged period.
We could revise the outlook to stable if following completion of Alcoa Corp.'s demerger, we consider:
Sufficient mitigants are available to offset potential structural subordination of Alumina's dividend from AWAC;Alcoa Corp.'s creditworthiness becomes more certain; and Alumina maintains the buffer in its key credit metrics, which include an adjusted FFO-to-debt ratio of greater than 45% and FFO cash interest coverage of greater than 9x.