Clarendon Alumina Production Limited, which is servicing a US$200 million eurobond due to mature in 13 years, has been downgraded by Fitch Ratings agency.

CAP, now 23 years in operation, is a partner with Alcoa in the Jamalco refinery in Clarendon.

The company is wholly owned by Jamaica.

CAP, which is valued on its balance sheet at about US$400 million by assets, now has a issuer default rating or IDR of B-, down from B, even lower than Jamaica's sovereign credit rating.

Downgraded ratings

Fitch in mid-November downgraded its sovereign ratings on Jamaica, signalling that it was concerned the Bruce Golding administration would not be able to adequately service payments on GOJ global bonds.

The downgrade of CAP is in accordance with that action.

The agency has also revised its outlook on the Jamaican company from stable to negative, in tandem with downturns in the world aluminium market and CAP's rising indebtedness.

Indeed, Alcoa has already announced the scale back in production by 15 per cent or 615,000 tonnes in two of its plants - Jamaica not included - as the market softened, driving down prices.

Last year, the Clarendon refinery produced 1.15 million tonnes of alumina, said Fitch, earning CAP revenues of US$117.2 million from the sale of 606,000 tonnes of alumina.

The company has projected salesfor FY 2008/09 of US$148 million, but it also expects production costs to run US$21 million ahead of sales at US$169 million.

CAP, which is among the ranks of state-owned lossmakers needing to be propped up by taxpayers, signalled at the top of the fiscal year that it would need US$172 million of support to assist with debt servicing, capital expenses and operating costs.

Too highly leveraged

Losses at that point had accumulated to US$143 million, according to finance ministry data.

Fitch is concerned that the company is too highly leveraged.

"At the end of March 2008, CAP had US$326.2 million of debt and US$16 million of cash and marketable securities translating to a total debt-to-EBITDA ratio of negative 9.4 times and a funds-from-operation-adjusted-leverage ratio of 6.9x," the agency said.

CAP's 8.5 per cent unsecured notes which mature in 2021 are trading at around US$70. Yields are at 12.6 per cent.

The bonds, which are guaranteed by the Jamaican government, are now rated 'B/RR4', down from 'B+/RR4'.

"The 15-year notes continue to be supported by an explicit uncon-ditional and irrevocable guarantee by the GoJ for timely interest and principal on the notes," said Fitch.

Generating millions

"The IDRs of CAP are rated one notch lower than Jamaica, reflecting other debt issuance at the company which have implicit support from the GoJ, but not the explicit guarantees which support the US$200 million unsecured notes.

For the financial year ended March 31, CAP generated US$21.1 million of funds from operations compared to a negative US$10.6 million in 2007.

The agency reported an operating loss of US$34 million and net losses of US$62 million.

Operating loss

Fitch said the operating loss was "primarily a reflection of high production costs in relation to caustic soda and fuel inputs and CAP's inability to pass them through to end customers."

The pass-through limitations were due to a long term supply contracts with Glencore into which the company is locked up to 2012.

"With the constraints currently being experienced in the capital markets, CAP does not have other significant sources to shore up its liquidity position," Fitch said.

CAP and Alcoa were initially 50:50 partners in Jamalco, with the American company having operational control.

However, after an upgrade of the refinery to a rated capacity of 1.425 million tonnes more than a year ago, Alcoa was to be awarded another five per cent of equity to take 55 per cent controlling interest in exchange for the investment in the project.

lavern.clarke@gleanerjm.com