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
