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Rating Action:

Moody's Assigns a Ba3 CFR to Alcoa Nederland Holding B.V.; Outlook Stable

20 Sep 2016

New York, September 20, 2016 -- Moody's Investors Service, ("Moody's") assigned a Ba3 Corporate Family Rating (CFR) and a Ba3-PD Probability of Default rating to Alcoa Nederland Holding B.V. (Alcoa Nederland). At the same time, Moody's assigned a Ba3 rating to Alcoa Nederland's proposed senior unsecured notes. Moody's also assigned a Speculative Grade Liquidity Rating of SGL-2. The outlook is stable. This is the first time Moody's has rated Alcoa Nederland Holding B.V.

Alcoa Nederland is a wholly owned subsidiary of Alcoa Upstream Corporation (Alcoa Corp.). Alcoa Corp is currently a wholly owned subsidiary of Alcoa Inc. (Alcoa). Alcoa is separating into two companies: Alcoa Corp, which will hold the bauxite, alumina, aluminum, cast products and energy business as well as the rolling operations in Warrick, Indiana and Alcoa Inc's 25.1% interest in the Ma'aden Rolling Company (Ma'aden), and Arconic (the surviving Alcoa entity that will be renamed Arconic) consisting of Global Rolled Products, Engineered Products & Solutions and Transportation and Solutions, the value added segments which specialize in auto sheet and products for the aerospace, transportation, building and construction and other industries.

Alcoa plans to distribute at least 80.1% of the issued and outstanding shares of Alcoa Corp, separating the upstream business from the value add mid-stream and down-stream businesses.

The notes will be issued by Alcoa Nederland Holding B.V. and prior to the separation will be guaranteed only by Alcoa Corp. Post separation, the notes will be guaranteed by Alcoa Corp. and restricted subsidiaries and have the same guarantee structure as the unrated $1.5 billion secured revolving credit facility. Proceeds from the note offering will be deposited into an escrow account together with cash amounts sufficient to meet all interest payments on the notes to separation. Should the separation be abandoned or not close by April 3, 2017, the notes will be redeemed together with accrued interest.

Proceeds from the notes will be used mostly to make a distribution to Alcoa to fund the transfer of certain assets in connection with the separation, with the balance retained for general corporate purposes.

..Issuer: Alcoa Nederland Holding B.V.

Assignments:

.... Probability of Default Rating, Assigned Ba3-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-2

.... Corporate Family Rating, Assigned Ba3

....Senior Unsecured Guaranteed Regular Bond/Debenture, Assigned Ba3, LGD4

Outlook Actions:

....Outlook, Assigned Stable

RATINGS RATIONALE

The Ba3 CFR considers Alcoa Corp's position as a leading producer of bauxite, alumina and aluminum, geographical and aluminum product diversity, and operational quality. From a business profile perspective, the company is well positioned within its products and markets served. Additionally, the company has a solid cost production profile, driven by continued refocusing of its refining and smelting system and idling/closure of higher cost facilities. However, the rating also incorporates the weak initial debt protection position, as measured by the EBIT/Interest ratio, which we expect to be no more than 1.5x for the year ending December 31, 2016, including Moody's standard adjustments, as well as expected margins for 2016 of approximately 4%, reflecting the commodity oriented business model. Leverage, as measured by the debt/EBITDA ratio is expected to range between 3.5x and 4.x. while free cash flow is expected to be negative given the high level of maintenance capital expenditures.

Excluding the rolling mills, currently part of Global Rolled Products, the majority of which will stay with Arconic, the alumina (includes bauxite) and primary metals segments generated $9.0 billion of net sales and $1.95 billion of EBITDA for the year ending December 31, 2015. For the six months ending June 30, 2016, these businesses accounted for $3.48 billion of revenue and $543 million of EBITDA. The contribution from the Warrick rolling mill is negligible. The decline in revenue and EBITDA in the first half of 2016 primarily reflects the reduced price environment for both alumina and aluminum, the lag on lower prices flowing through, as well as capacity reductions undertaken by Alcoa in recent years in light of weak aluminum markets, global overcapacity and higher cost smelters. With respect to the bauxite and alumina business, most of this rests within Alcoa World Alumina & Chemicals (AWAC), which is 60% owned ultimately by Alcoa and 40% by Alumina Ltd. (unrated). Alcoa is the manager/operator and fully consolidates AWAC. On a proportionate consolidation basis, we estimate currently that this adds at least half a turn to leverage metrics as measured by the debt/EBITDA ratio.

Additionally, the CFR considers the company's exposure to essentially a single metal commodity, as the demand for bauxite and alumina is directly correlated to the demand for aluminum, the volatility in the alumina and aluminum markets driven by weak global growth expectations and industrial production levels, overcapacity, particularly given the increase in Chinese smelting capacity, which mitigates the positive impact of supply curtailments and closures by other producers, supply/demand imbalances, and market sentiment. Given the challenges facing the industry, and the relatively weak aluminum price environment, we do not anticipate strong growth in EBITDA, which we forecast to be around $1 billion for 2016.

Alcoa Corp's operations have historically been conducted through two segments: Alumina and Primary Metals. Going forward, these businesses will be reported in five segments: Bauxite, Alumina, Aluminum, Cast Products, and Energy, while a sixth segment will include the rolling operations at Warrick, Indiana and the 25.1% interest in Ma'aden. Cast Products accounted for roughly 32% of 2015 total segment revenue, while Aluminum and Alumina each contributed 26%, and the other three segments accounted for the remaining 16%. The company's operations primarily include the mining of bauxite, the refining of bauxite into alumina, and the production of primary aluminum and a range of cast aluminum products. The Warrick rolling mill will continue to produce aluminum for the can-sheet end market, which is a lower margin, volume driven business.

The SGL-2 Speculative Grade Liquidity rating reflects Alcoa Corp's initial good liquidity position. Liquidity is supported by an undrawn $1.5 billion revolving credit facility, which is secured by substantially all assets. Free cash flow is expected to be negative the next 12-18 months, driven largely by high maintenance capital expenditures. However, we expect Alcoa Corp. to have a comfortable cash balance at separation and this, together with the availability under the revolver provide acceptable support for the expected outflows.

The Ba3 senior unsecured debt rating, at the same level as the CFR, reflects the preponderance of unsecured debt in the capital structure, given the level of unsecured notes being issued and unfunded pension obligations relative to the $1.5 billion secured revolving credit facility.

The stable outlook reflects our expectation for slight improvement in Alcoa's leverage and debt protection metrics over the next twelve to eighteen months, while also incorporating the headwinds facing the company in light of slowing growth rates in China, overcapacity in the global aluminum markets, and continued pressure on aluminum and alumina prices.

The rating could be downgraded should the EBIT margin be sustained at less than 5%, or interest coverage, as measured by the EBIT/Interest ratio, not improve to at least 2x. The rating could be upgraded should the EBIT margin be sustained above 7% or CFO-Dividends/Debt improve to more than 20%.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Alcoa Corp will be headquartered in New York, New York. Revenues for the twelve months ended December 31, 2015 were approximately $11.2 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carol Cowan
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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