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Fitch Affs Alcoa Aluminio's SENs Rtg; Prod Cutbacks Lwr Exp Flows.

Business Editors


Fitch affirms the `BBB-` foreign currency rating on the secured exports notes (SENs) of Alcoa Aluminio S.A. (Aluminio).

The rating action considers the current energy crises in Brazil and the effects of the associated electricity rationing and production cuts on Aluminio and the SENs.

Although Aluminio`s consolidated cash flow and EBITDA-to- interest expense coverage ratio remain strong for the rating category, recent cutbacks in production and export sales due to the energy crisis, as well as the strategic decision to redirect production to the domestic market to take advantage of tax credits, have lowered cash flow to the offshore export trust and the SEN's debt service coverage ratio. Back-up aluminum supply under an agreement with Aluminio's parent has supplemented export sales to maintain the SEN's debt service coverage ratio at minimum levels.

The rating is supported by the company's strong operating fundamentals, its position as a leading, low-cost, fully-integrated aluminum producer in Latin America, a conservative financial profile, and its solid ownership structure.

As part of a nationwide energy rationing effort in Brazil, Aluminio has reduced production at its Pocos de Caldas aluminum smelting and refinery facilities, located in the southeastern state of Minas Gerais, by approximately 50% (from about 90,000 tons per year to 45,000) and at those in Sao Luis (Alumar) in the northern region by approximately 25% (from about 370,000 tons per year to 277,000 tons). Aluminio chose to reduce production at its Pocos facility by more than the required 25% in order to sell approximately 48MW/h of its electricity supply on the spot market. On a cash flow basis, these sales of electricity essentially offset the effects of the 50% reduction in aluminum production and sales at Pocos.

Although the production from Pocos is directed primarily to the domestic market and that of Alumar to the export market, the 50% production reduction at Pocos affects export sales because the company has chosen to use much of its 54% share of the Alumar aluminum production to sell to the domestic market at the expense of exports. This redirection of Alumar production to the domestic market was a strategic decision taken to maximize the use of value-added tax credits as a result of a recent change in tax legislation in the state of Maranhao at the end of 2000. Aluminio production currently being designated to the export market is now approximately 10,000 tons per quarter, down from about 34,000 tons per quarter in 2000.

Under a back-up supply agreement associated with the SENs transaction, Aluminio's controlling parent, the Alcoa Inc. (Alcoa) in the United States, will provide the remaining production needed to meet Aluminio's obligations under the Aluminum Supply Agreement. Fitch expects the need for Alcoa's support

to be temporary and will be sufficient to meet the SEN's quarterly debt service coverage test of 1.25x. In certain circumstances, Alcoa is not required to deliver product under the back-up agreement and in these cases Aluminio will be required to redirect a sufficient amount of product into the export market.

Such reduced volumes of exports sales are a result or several coinciding factors such as: 1) the current and temporary energy rationing program and 2) the associated strategic decisions to reduce production more than the required amount at Pocos in order to sell electricity on the spot market, and to redirect export production to the domestic market to fully realize the benefit of value-added tax credits through domestic sales. Thus, assuming the energy rationing measures remain in place for the southeastern region where the Pocos facility is located, but are lifted by the Brazilian government for the northern Alumar production facilities at the end of November 2001. Fitch expects Aluminio's export sales volumes to double from current levels to reach approximately 80,000 tons per year in 2002. Such volumes are expected to bring debt service coverage on the SENs to about 2x in 2002. If the energy crisis in Brazil improves by 2003 so that energy rationing requirements are removed for all areas including the southeastern region, such that Pocos operates at full capacity, Aluminio expects to return to steady-state export sales volumes of approximately 130,000-150,000 tons per year. If aluminum prices average $1,500, such export sales volumes would provide debt service coverage on the SENs of approximately 3.5x, consistent with the rating category.

The rating affirmation is also supported by Aluminio's strong operating and financial profile, which has improved significantly over the last few years. Since 1997, the company's gross debt has decreased from US$567 million to US$371 million as of June 30, 2001 and its EBITDA has improved from US$152 million to an expected US$180 million for year-end 2001. As a result, Aluminio's interest coverage ratio has increased from 2.4 times (x) in 1997 to 7.9x as of June 30, 2001 and its leverage ratio, as measured by debt- to-EBITDA has decreased from 3.7x to 1.8x over the same period.

Alcoa Aluminio is the largest privately owned, integrated aluminum producer in Latin America. The company is majority- owned and controlled by, the Alcoa Inc. (Alcoa) in the United States, the world's leading producers of aluminum and alumina. Alcoa provides Aluminio with significant financial and operational support. Alcoa holds 59% of the voting stock of Alcoa Aluminio. The balance is held by the Camargo Correa Group, a leading Brazilian conglomerate active in the contracting and industrial sectors. Alcoa Aluminio produces alumina, primary aluminum and related industrial chemicals, fabricated aluminum products and packaging products such as PET preforms and bottles. Aluminio's produced approximately 300,000 tons of aluminum in 1999 and 2000. In 2000, the company exported 136,000 tons of aluminum ingot, used 96,000 tons in downstream applications and sold 67,000 tons in Brazil.
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Publication:Business Wire
Geographic Code:3BRAZ
Date:Aug 29, 2001
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