TEXT-S&P keeps Novelis on CW neg on weak profitability

The following statement was released by the rating agency) June 2 - Standard & Poor's Ratings Services today said it kept the ratings on aluminum rolled products producer Novelis Inc., including the 'BB-' long-term corporate credit rating, on CreditWatch with negative implications where they were placed Feb. 20, 2009. "The ratings remain on CreditWatch following Novelis' disclosure of a liquidity squeeze brought about by the high volatility of primary aluminum prices," said Standard & Poor's credit analyst Donald Marleau. To support its near-term cash requirements, Novelis received a US$100 million long-term unsecured loan from an affiliate of the India-based Aditya Birla Group (not rated). Birla Group controls Novelis' parent, Hindalco Industries Inc. (not rated), and support from the parent is currently factored into the rating on Novelis. We believe that the relative stability of aluminum prices in the past several months should have alleviated the pressure on Novelis' liquidity, and that the company's liquidity should improve significantly in the second half of calendar 2009, as its cash flows benefit from lower investments in working capital stemming from lower aluminum prices, weaker volumes, and seasonal factors. Standard & Poor's will likely resolve the CreditWatch in early July, after Novelis releases its fiscal 2009 financial statements. Assuming that the company's liquidity strains abate in the next few months, we will be primarily focused on fundamental market conditions and parental support in resolving the CreditWatch. We believe that lower volumes, particularly in the automotive and construction segments, will have a marked negative effect on Novelis' profitability and cash flow in 2009, which could preclude any reduction of the company's heavy debt load. On the other hand, Standard & Poor's still believes that Novelis is strategically important for Hindalco. Hence, a key determinant for the Novelis rating is the parent's willingness and ability to support Novelis amid Hindalco's own weakened profitability and large capital expenditures.