S&P affirms Noranda Aluminum Holding 'B+' rating

U.S.-based aluminum producer Noranda Aluminum Holding Corp. has announced that it is seeking to enter into a new $300 million senior secured term loan and a new $250 million asset-based revolving credit facility.

We are affirming our 'B+' corporate credit rating on Noranda. We are assigning a 'BB-' issue-level rating and '2' recovery rating to the proposed term loan.

At the same time, we are lowering our issue-level rating on Noranda's existing senior unsecured notes due 2015 to 'B-' from 'B' and revising the recovery rating to '6' from '5'.

The stable outlook reflects our assessment that aluminum prices should remain high enough to support the company's credit metrics at levels consistent with the rating despite the additional debt. Rating Action On Feb. 21, 2012, Standard & Poor's Ratings Services affirmed its 'B+' corporate credit rating on Franklin, Tenn.-based Noranda Aluminum Holding Corp. (Noranda). The rating outlook is stable. At the same time, we assigned our 'BB-' issue-level rating (one notch above the corporate credit rating) to the proposed $300 million term loan of Noranda Aluminum Acquisition Corp., a subsidiary of Noranda. We also assigned a recovery rating of '2', indicating our expectation for a substantial (70% to 90%) recovery in the event of payment default. We also lowered our issue-level rating on Noranda Aluminum Acquisition's existing senior unsecured notes due 2015 to 'B-' (two notches below the corporate credit rating) from 'B'. We also revised our recovery rating to '6', indicating our expectation for a negligible (0% to 10%) recovery in the event of payment default, from '5'. The company will use the proceeds from the proposed term loan to repay Noranda Aluminum Acquisition's existing senior secured credit facilities, to fund a tender offer for a portion of its existing senior unsecured notes and a special dividend of $1.25 per share, and for other general corporate purposes. We anticipate that we will withdraw our ratings on Noranda's existing bank credit facilities upon the successful completion of its refinancing. Rationale The ratings on Noranda reflect the company's "vulnerable" business risk profile and "significant" financial risk profile (as our criteria define the terms). The vulnerable business risk profile is reflected in Noranda's limited operating diversity, its exposure to the highly cyclical aluminum industry, and its relatively high cost position (absent earnings credits from bauxite and alumina sales). The significant financial risk profile reflects our expectation that, despite lower aluminum prices, the company will maintain leverage between 4x and 5x and funds from operations (FFO) to total debt of around 15%. The rating and outlook incorporate our expectation that the company will sell more than 580 million pounds of primary aluminum to external customers in 2012, roughly the same amount it sold in 2011. We assume that the company will sell about 80% of the 2012 amount as a value-added product, which would command a premium over the Midwest transaction price. (This price includes the cost of freight and handling to ship aluminum from London Metals Exchange warehouses to the Midwest.) In addition, we have assumed shipments from Noranda's downstream operations in 2012 to be about 365 million pounds--an amount similar to 2011 levels. Our EBITDA assumptions are sensitive to aluminum prices and fluctuate about $60 million for every 10 cent change in price. We expect EBITDA of about $150 million to $200 million in 2012. This combines the above assumptions with an assumed average LME aluminum price of $0.95 per pound and a Midwest premium of $0.05 compared with an average LME aluminum price of about $1.10 per pound and Midwest premium of $0.075 in 2011. Our EBITDA expectation also factors in relatively flat cash costs over 2011 levels. This, combined with higher debt balances, could result in adjusted leverage of between 4x and 5x--a level we would consider to be acceptable for the current rating. Noranda, a primary aluminum producer with downstream operations, has a vertically integrated upstream segment which can account for more than 80% of EBITDA. However, this segment operates only one smelter, thus highlighting the risk we associate with the company's limited operating diversity since any disruption has the potential to severely affect overall financial results. In our view, the aluminum industry is cyclical and volatile, and profitability suffered during the economic downturn. End-market demand softened materially starting in 2008, and prices declined by about 50% between March 2008 and March 2009, before beginning to recover later in 2009 and 2010. Indeed, prices were less than $0.85 per metric pound for a period of about 12 months, a level at which we believe 50% or more of primary aluminum smelters become unprofitable. Although prices recovered significantly in 2010 and 2011, we expect price volatility to continue and believe that prices could continue to be pressured if high LME inventories begin to flood the market. Liquidity We view Noranda's liquidity as "adequate" (under our criteria) to meet its needs over the next 24 months. Our view of the company's liquidity profile includes:

Our expectation that liquidity sources (including availability under the company's proposed asset-based revolving credit facility) should exceed uses by at least 1.2x over the next year and at least 1.0x over the next two years;

Our expectation that liquidity sources will continue to exceed uses, even if EBITDA were to decline by 15%; and

The company would continue to exceed the availability threshold under its proposed credit facility even with a 15% drop in EBITDA. Pro forma for the transaction, we expect Noranda to have $115 million in balance sheet cash. We estimate the company will have approximately $165 million of availability on its proposed $250 million asset-based revolving credit facility (ABL), less approximately $30 million in letters of credit. Availability under the ABL is subject to a borrowing base of eligible receivables and inventory, which fluctuates throughout the year due to seasonal working capital changes. We expect free cash flow to be marginally negative in 2012 due to higher capital expenditures to fund a capacity expansion at the company's New Madrid, Mo., aluminum smelter. In our view, the company doesn't have any financial covenant issues; no maintenance covenants govern Noranda's proposed credit agreement or its existing senior unsecured notes. A fixed-charge covenant will apply only if availability under the ABL falls below $20 million. In light of our projections, we expect Noranda to maintain adequate liquidity and not trigger the fixed-charge covenant. Assuming the transaction is completed as proposed, Noranda will not have any maturities until 2015, when its senior unsecured notes mature. The maturity of the new $300 million term loan is 2019; however, if more than $100 million of the notes remains outstanding 91 days before maturity, the term loan facility's maturity will accelerate to 2015. Recovery analysis The rating on Noranda Aluminum Acquisition's proposed $300 million term loan is 'BB-' with a recovery rating of '2', indicating our expectation for a substantial (70% to 90%) recovery in the event of payment default. The rating on Noranda Aluminum Acquisition's existing senior unsecured notes due 2015 is 'B-' with a recovery rating of '6', indicating our expectation for a negligible (0% to 10%) recovery in the event of payment default. (For the complete recovery analysis, see our recovery report on Noranda, to be published later on RatingsDirect.) Outlook The stable rating outlook reflects our expectation that Noranda will continue to maintain leverage metrics of 4x to 5x, which we would consider to be in line with the current rating, despite our view of lower aluminum prices in 2012 as compared with 2011. A gradual recovery in end-market demand should also aid operating performance in 2012. A negative rating action could occur if aluminum prices decline to and are sustained below $0.95 for an extended period, resulting in our assessment that the company's liquidity position could tighten significantly and adjusted leverage would likely remain greater than 5x. An upgrade is unlikely at this time given Noranda's vulnerable business risk profile--owing to its relatively small size, its lack of operating diversity, and its exposure to volatile aluminum price and demand swings. Related Criteria And Research

Issuer Ranking: North American Metals and Mining Companies, Strongest to Weakest, Jan. 9, 2012

Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

Key Credit Factors: Methodology And Assumptions On Risks In The Metals Industry, June 22, 2009

2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed Noranda Aluminum Holding Corp. Corporate Credit Rating B+/Stable/-- Downgraded; Recovery Rating Revised

To From Noranda Aluminum Acquisition Corp. Senior Unsecured B- B Recovery Rating 6 5 New Rating; Recovery Rating Assigned Noranda Aluminum Acquisition Corp. Senior Secured US$300 mil bank ln BB-

Recovery Rating 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.