The revised outlook to stable reflects Moody's view that Aluar ultimately cannot be completely de-linked from the credit quality of the Argentinean government (B3, stable), and thus its ratings need to more closely reflect the risk that they share with the sovereign.
Moody's believes that there has been no deterioration in the intrinsic credit quality of Aluar. However, a weaker sovereign has the potential to create a ratings drag, and therefore it is appropriate to limit the extent to which these issuers are rated higher than the sovereign, in line with Moody's Rating Implementation Guidance "How Sovereign Credit Quality May Affect Other Ratings" published on 13 February 2012, and available on www.moodys.com.
Aluar remains rated above the sovereign rating of B3 as a reflection of its stronger credit quality.
The B2 and Aa3.ar ratings reflect Aluar's leading market position as the only aluminum smelter in Argentina, its ability to maintain competitive cost position based on its long-term volume based supply contracts and its adequate financial performance to face any potential slowdown in the industry's cycle. Aluar's ratings also consider its favorable business model since Aluar serves 100% of Argentina domestic demand and generates significant foreign currency earnings through its worldwide exports. Some 70% of Aluar's total production is exported.
These key strengths are offset by the nature of Aluar's business, which is exposed to cyclical commodity aluminum prices, and its limited geographical diversification in terms of operating assets. The company operates a single primary aluminum production facility and is dependent on a single alumina supplier.
The stable outlook is based on Moody's expectation that Aluar will continue to successfully execute its business strategy, in spite of continued weak economic fundamentals in Argentina and aluminum price volatility. Additionally, the stable outlook reflects Moody's expectation that Aluar will maintain adequate liquidity to withstand a deterioration in cash generation arising from an expected loss in production at its single smelter in Puerto Madryn, due to weather related power disruption.
While unlikely at this juncture, rating could experience upward pressure if Argentina's B3 government bond rating would be upgraded. In addition, an upgrade of the ratings could result from a continued strengthening of Aluar's revenues while maintaining its operating margins and low leverage. Quantitatively, upward momentum could result if Aluar's total debt to EBITDA is sustained below 1.0x times (1.3x times as of the last twelve months ending March 31, 2012) and EBIT margin above 19% (13.2% as of the last twelve months ending March 31, 2012), both on a sustainable basis.
Negative rating pressure could arise if there is a prolonged slowdown in Aluar's end markets, with sustained aluminum price weakness leading to a deterioration in operating margins. Quantitatively, a downgrade in the ratings or outlook could be caused by EBIT/interest of below 2.5x, debt/EBITDA above 5.0x or operating cash flow less dividends to debt of less than 10% for an extended period of time.
Moody's notes that any downward rating action at the sovereign level would likely result in negative rating actions at Aluar, as the current notching gap will likely be maintained in the absence of a significant change in credit quality at Aluar.
Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in March 2011 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".
Aluar Aluminio Argentino S.A.I.C. (Aluar) is the sole primary aluminum producer and the main semi-manufactured aluminum maker in Argentina. With total revenues of USD 1.2 billion as of the last twelve months ending March 31, 2012, approximately 30% of Aluar's production is sold in Argentina and the remaining 70% is exported worldwide.
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Veronica Amendola Vice President - Senior Analyst Corporate Finance Group Moody'sLatin America Ing. Butty 240 16th Floor Buenos Aires City C1001AFB Argentina JOURNALISTS: (800) 666 -3506 SUBSCRIBERS: (5411) 3752 2000 Brian Oak MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Latin America Ing. Butty 240 16th Floor Buenos Aires City C1001AFB Argentina JOURNALISTS: (800) 666 -3506 SUBSCRIBERS: (5411) 3752 2000 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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