New York, April 09, 2020 -- Moody's Investors Service, ("Moody's") affirmed
Alcoa Nederland Holding B.V.'s (ANHBV) Ba1 Corporate
Family Rating, its Ba1-PD Probability of Default Rating and
its Ba1 senior unsecured note ratings. The notes are guaranteed
by Alcoa Corporation (Alcoa). The speculative grade liquidity rating
remained unchanged at SGL-1. The outlook remains stable.
"The affirmation of ANHBV's Ba1 CFR reflects the expectation
that Alcoa's liquidity profile will remain solid and that the company's
metrics, while under pressure in 2020 on lower aluminum and alumina
prices will return to stronger levels in 2021 as global economies recover
from the impact of the coronavirus" said Carol Cowan, Moody's
Senior Vice President and lead analyst for Alcoa.
Affirmations:
..Issuer: Alcoa Nederland Holding B.V.
.... Corporate Family Rating, Affirmed
Ba1
.... Probability of Default Rating,
Affirmed Ba1-PD
.... Gtd Senior Unsecured Regular Bond/Debenture,
Affirmed Ba1 (LGD4)
Outlook Actions:
..Issuer: Alcoa Nederland Holding B.V.
....Outlook, Remains Stable
RATINGS RATIONALE
The Ba1 CFR at ANHBV considers its parent's (Alcoa) position as
a leading producer of bauxite, alumina and aluminum (including cast
products), geographical and aluminum product diversity, and
operational quality. From a business profile perspective,
Alcoa Corp. is well positioned within its products and markets
served. Additionally, the company has a good cost production
profile, driven by continued refocusing of its refining and smelting
system and idling/closure of higher cost facilities.
However, 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. Additionally,
the alumina and aluminum markets exhibit volatility driven by global growth
expectations and industrial production levels. Further considerations
include industry overcapacity, particularly given the increase in
Chinese smelting capacity, which offsets the positive impact of
supply curtailments and closures by other producers, supply/demand
imbalances, and market sentiment. companies. Prior
to the outbreak of the coronavirus, the bauxite, alumina and
aluminum markets were expected to be in surplus in 2020, and this
surplus is expected to widen.
Alcoa's EBITDA of $1.5 billion in 2019 was well below
2018 levels although we believe 2018 aluminum and alumina prices were
over inflated due to supply issues for alumina and aluminum as well as
the impact of Section 232 tariffs imposed in the US in 2018 and sanctions
against UC RUSAL (Rusal). Consequently, we do not view 2018
as a reasonable comparative year.
Aluminum prices in 2019 remained relatively range bound due to concerns
on trade tensions between the US and China. Additionally,
still relatively robust alumina prices and the lag impact of this cost
input pressured the aluminum segment with EBITDA generation of around
$25 million in 2019. The company was free cash flow generative
prior to the payment of minority distributions, which included an
element of carry over calculations from the strong performance in 2018.
Despite the lower EBITDA in 2019, Alcoa's leverage position,
as measured by the debt/EBITDA ratio remained acceptable at 2.3x.
Should aluminum prices in 2020 average for the year around $1,390/MT
($0.63) we estimate that leverage, as measured by
the debt/ EBITDA ratio, could increase to around 3.2x.
Aluminum prices for the first quarter averaged approximately $1,610
($0.73.lb) with a more precipitous fall in late March/April
to date).
The stable outlook incorporates Alcoa's solid liquidity position
at year-end 2019 and anticipates that the company will remain focused
on its cash generation and levers it has to minimize cash burn.
Additionally, the company evidenced moderate leverage relative to
its CFR of 2.3x providing some cushion for deterioration in performance
given the challenging market conditions and weakening in aluminum and
alumina prices due to the coronavirus outbreak, the duration of
which is uncertain. While weaker alumina prices will impact performance
in this segment, such will benefit performance in the smelting segment.
Additionally, lower fuel input costs, electricity costs and
benefits from deprecating currencies in countries where Alcoa operates
will provide some mitigation.
The SGL-1 speculative grade liquidity rating acknowledges the company's
solid liquidity as evidenced by its cash position of $879 million
at December 31, 2019 and its $1.5 billion secured
revolving credit facility (RCF -unrated) at Alcoa Nederland,
guaranteed by Alcoa and maturing in November 2023. The facility
is unused except for around $17 million in letters of credit.
The RCF is secured by substantially all assets. The RCF contains
two financial covenants; Consolidated EBITDA/interest of no less
than 5x and consolidated debt/EBITDA of no more than 2.5x (Moody's
interest coverage and leverage ratios include our standard adjustments
for pensions and operating leases). Additionally, the company
has no material maturities until the revolver expires in November 2023.
Alcoa's subsidiary Alcoa Norway ANS has a NOK 1.3 billion
($147MM at year-end December 31, 2019) facility maturing
October 2, 2020, guaranteed by Alcoa, and through another
subsidiary there is a $120 million 3-year securitization
program, also guaranteed by Alcoa.
Alcoa is expected to have good liquidity to accommodate the current difficult
operating environment including maintenance capital expenditures of approximately
$290 million. We would expect the company to evaluate and
reduce discretionary capital expenditures in the current tightened operating
environment.
The Ba1 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 and unfunded pension obligations relative
to the $1.5 billion secured revolving credit facility.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The aluminum sector is
a sector that will be affected by the shock given the sensitivity of its
customers to market demand, such as automotive, construction,
general manufacturing and market sentiment as to global economic contraction
expectations. We regard the coronavirus outbreak as a social risk
under our ESG framework, given the substantial implications for
public health and safety.
As a primary aluminum producer, Alcoa faces numerous environmental
risks across the totality of its operations with regulations varying significantly
from country to country and region to region. Environmental considerations
are not a factor in Alcoa's ratings.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the volatility in the commodities in which Alcoa participates and
potential for wide swings in performance, further upward rating
movement could be limited. Additionally, upward rating movement
to investment grade is constrained by the secured nature of the bank revolving
credit facility. However, ratings could be upgraded should
Alcoa be able to sustain an EBIT margin of at least 17.5%,
EBIT/interest of at least 7x, and debt/EBITDA of no more than 2x.
Continued discipline in its capital allocation strategy and financial
policy would also be a consideration.
The ratings could be downgraded should EBIT/interest be sustained below
4.5x, EBIT margins be less than 8%, leverage
exceed and be sustained above 2.75x. as the impact of the
current difficult economic conditions ease into 2021. Greater negative
free cash flow than expected and liquidity contraction would also be a
downgrade consideration.
The principal methodology used in these ratings was Mining published in
September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Alcoa Nederland is a wholly owned subsidiary of Alcoa Corporation.
Alcoa holds the bauxite, alumina, aluminum, cast products
and energy business as well as the rolling operations in Warrick,
Indiana. Alcoa's bauxite and alumina business is conducted
through its 60% (Alcoa)/40% (Alumina Ltd) joint venture.
Revenues for the twelve months ended December 31, 2019 were $10.4
billion.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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: 1 212 553 0376
Client Service: 1 212 553 1653
Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
