OREANDA-NEWS. S&P Global Ratings today said it affirmed its 'B+' long-term corporate credit rating on global rolled aluminum producer Novelis Inc. The outlook is stable.

At the same time, S&P Global Ratings assigned its 'B' issue-level rating and '5' recovery rating to Novelis Corp.'s proposed US$525 million of senior unsecured notes. A '5' recovery rating corresponds with modest (10%-30%; at the lower end of the range) recovery in our simulated default scenario. The new notes will rank pari passu with the company's existing senior unsecured notes, including Novelis' unsecured notes due in 2020.

S&P Global Ratings also affirmed its 'BB' issue-level rating on Novelis' senior secured term loan. The '1' recovery rating is unchanged and corresponds with very high (90%-100%) recovery in our default scenario. S&P Global Ratings also affirmed its 'B' issue-level rating, with a '5' recovery rating on the company's senior unsecured notes outstanding. "The affirmation follows the company's announced plan to issue US$525 million of senior unsecured notes maturing in 2024 to repay debt outstanding," said S&P Global Ratings credit analyst Jarrett Bilous.

We expect proceeds from the issuance to be used to repay an equal amount (before modest call premiums) of Novelis' US$1.1 billion senior unsecured notes due December 2017, with no incremental impact on leverage. The new notes will be issued by wholly owned U. S. subsidiary, Novelis Corp., for tax reasons but will have the same joint and several subsidiary guarantors as the existing 2017 and 2020 notes issued by parent Novelis Inc. As such, we consider the proposed new notes to rank pari passu with the existing notes. We believe that any remaining notes due 2017 will be repaid well in advance of maturity with new, equally ranking senior unsecured debt.

The 'B+' long-term corporate rating on Novelis Inc. reflects our view of the company's satisfactory business risk profile and highly leveraged financial risk profile. We also consider Novelis a moderately strategic subsidiary of its parent, Hindalco Industries Ltd. (not rated), but this assessment does not affect the rating.

Novelis' satisfactory business risk assessment, in our view, primarily reflects the company's leading market position in global rolled aluminum products, geographically diversified operations, and stable profitability. Novelis is the world's largest producer of rolled aluminum products with an established position in the growing auto market.

The stable outlook primarily reflects our view that Novelis' core credit measures will improve over the next two years. We expect the company to generate earnings and cash flow growth over this period, with a corresponding reduction in growth-related capital expenditures that result in free cash flow and debt repayment. We estimate adjusted debt-to-EBITDA in the 6x area in the next two years, with interest coverage of over 2x.

We could lower the rating if Novelis generates EBITDA interest coverage below 2x or adjusted debt-to-EBITDA that remains near 8x over the next 12-18 months. In this scenario, we would assume slower-than-expected growth in earnings and cash flow from subdued shipment levels, or operating cost pressure that strains free cash flow generation and limits improvement in net debt. We could also lower our ratings if refinancing risk increases or if Novelis' group credit profile weakens.

We consider a positive rating action unlikely over the next year because we believe the company will maintain a highly leveraged financial risk profile, and do not expect a significant improvement in its group credit profile. However, an upgrade could result from Novelis generating adjusted debt-to-EBITDA of about 5x in tandem with a corresponding improvement in the group credit profile.