NEW YORK–(BUSINESS WIRE)–Fitch Ratings has placed Alcoa Inc.’s (Alcoa; NYSE: AA) ratings on
Ratings Watch Positive following the company’s plans to separate into
two companies. A complete list of ratings follows this release.
Nearly $14 billion in commitments and securities is affected.
On Sept. 28, 2015, Alcoa announced that its Board of Directors approved
a plan to separate into two independent, publicly traded companies. The
transaction is intended to qualify as a tax-free transaction and it is
expected to be completed in the second half of 2016. The Upstream
Company (UC) will comprise the units that today make up Global Primary
Products, and the Value-Add Company (VAC) will include the Global Rolled
Products and Engineered Products and Solutions (EPS) units. The company
intends to capitalize the UC targeting a strong non-investment-grade
rating. The VAC is to be capitalized targeting an investment-grade
rating. Pursuant to the company’s 8K filed Sept. 29, 2015, the debt of
Alcoa would be retained by the VAC.
–The former EPS businesses are expected to benefit from the recent
acquisitions of Firth Rixon, Tital and RTI International as well as
–LME Aluminum prices remain fairly flat over the next 24 months as new
capacity is added at the low end of the cost curve;
–Dis-synergies and make-whole premiums associated with the transactions
–Cash and pension obligations will be apportioned in consideration of
the Alcoa’s rating targets;
–Free cash flow (FCF) generation will remain a goal of each company;
–There will be no shareholder distributions solely as a result of the
The UC had a very strong 2014 which weakened thereafter on lower
aluminum prices. Alcoa has significantly restructured this business to
lower costs as well as reduce exposure to the LME price, but aluminum
price is a key determinant of earnings. Fitch believes FFO gross
leverage of 3x and below is consistent with a strong
Fitch believes the VAC has more consistent margins and lower commodity
price risk. Fitch believes FFO gross leverage of 2.5x-2.75x is
consistent with an investment-grade rating for this entity.
Earnings and cash flow benefit from Alcoa’s leading positions in
aluminum, key aerospace, automotive and construction markets, strong
control of costs and spending, and the flexibility afforded by the scope
of its operations. The UC benefits from being vertically integrated and
geographically diversified. The VAC benefits from scale in research and
development, past restructuring efforts, and growing end-market demand.
The Rating Watch Positive will be addressed when the VAC capital
structure is known.
NEGATIVE: Future developments that may, individually or collectively,
lead to negative rating action include:
–FFO adjusted net leverage expected to be sustainably above 3x and FCF
negative in the amount of $200 million or more on average.
POSITIVE: Future developments that may lead to a positive rating action
–FFO adjusted net leverage at the issuer expected to be sustainably
under 2.5x-2.75x, and FCF positive on average.
–EBIT margins of at least 8% on average.
At June 30, 2015, the $4 billion revolver maturing July 25, 2019 was
fully available and cash on hand was $1.3 billion. The revolver has a
covenant that limits consolidated indebtedness to 150% of consolidated
As of Dec. 31, 2014, near-term scheduled debt maturities were: $29
million in 2015, $28 million in 2016, $767 million in 2017, $1 billion
in 2018, and $772 million in 2019.
According to the company’s form 10K, at Dec. 31, 2014, aggregate pension
plans were underfunded by $3.3 billion, with U.S. pension plans
underfunded by $2.7 billion on a U.S. GAAP basis. While funding was 75%
on a GAAP basis, management announced that it is 90%+ funded on an ERISA
basis. The minimum required contribution to pension plans is estimated
to be $485 million in 2015. Management intends to apportion the
obligations and assets according to the entity where the associated
Fitch has placed the following ratings on Rating Watch Positive:
–Issuer Default Rating (IDR) at ‘BB+’;
–Senior notes at ‘BB+’;
–$4 billion revolving credit facility at ‘BB+’;
–Series A preferred stock at ‘BB-‘;
–Series B preferred stock at ‘B+’;
–Short-term IDR at ‘B’;
–Commercial paper at ‘B’.
Additional information is available at ‘www.fitchratings.com‘.
Corporate Rating Methodology – Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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Monica M. Bonar, +1-212-908-0579
Fitch Ratings, Inc.
33 Whitehall Street
York, NY 10004
Megan Neuburger, +1-212-908-0501
Alyssa Castelli, +1-212-908-0540