New York, July 08, 2020 -- Moody's Investors Service, ("Moody's") assigned
a Ba1 rating to Alcoa Nederland Holding B.V.'s (ANHBV)
new senior unsecured notes, guaranteed by Alcoa Corporation (Alcoa)
and restricted subsidiaries. All other ratings, including
the Speculative Grade Liquidity Rating remain unchanged.
"Although the increase in gross debt will contribute to a slightly
more elevated leverage position, Alcoa will continue to exhibit
excellent liquidity and strong cash balances relative to requirements"
said Carol Cowan, Moody's Senior Vice President and lead analyst
for Alcoa.
Assignments:
..Issuer: Alcoa Nederland Holding B.V.
....Senior Unsecured Regular Bond/Debenture,
Assigned Ba1 (LGD4)
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 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, although Alcoa has 3rd party sales in both its bauxite
and alumina segments, the CFR considers the company's exposure
to essentially a single metal commodity-- aluminum- 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.
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, particularly in aluminum.
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.
Despite the lower EBITDA in 2019, Alcoa's leverage position,
as measured by the debt/EBITDA ratio remained acceptable at 2.3x,
providing a degree of cushion for deterioration in 2020 from the impact
of the coronavirus on global economies and aluminum demand. Supply
chain backup is anticipated on the lower automotive and aerospace build
rates. Additionally, broader manufacturing and industrial
markets will see demand deterioration and recovery is expected to be protracted
across most industries. Should average aluminum prices in 2020
range between approximately $1,500/MT and $1,600/MT
we estimate that leverage, as measured by the debt/EBITDA ratio
(including Moody's standard adjustments and the increase in debt)
would range between 3.1x and 2.8x. Although aluminum
prices have rallied recently (from a low of around $1,410/MT
in early April to currently around $1,580/MT) from improving
economic growth in China as well as improving sentiment, given the
global demand weakness, we do not expect much further upward momentum,
absent unexpected events.
The stable outlook incorporates Alcoa's solid liquidity position
at March 31, 2020 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 2.2x at March 31, 2020 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
relative to 2019 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
although reduced hydro sales in Brazil will negate smelter power cost
savings.
The SGL-1 speculative grade liquidity rating acknowledges the company's
solid liquidity as evidenced by its cash position of $829 million
at March 31, 2020 and its $1.5 billion secured revolving
credit facility (RCF -unrated) at Alcoa Nederland, guaranteed
by Alcoa and maturing in November 2023. Alcoa's 2nd quarter preliminary
results indicate that cash at June 30, 2020 had increased to more
than $950 million on working capital management and other actions
that contributed to improved costs.
The RCF is secured by substantially all assets. The RCF was amended
in April 2020 to provide that for the 4 quarters from April 1, 2020
the consolidated debt/EBITDA covenant shall not exceed 3x during the amendment
period and otherwise 2.5x. The Consolidated EBITDA/interest
covenant requirement remained at no less than 5x. At March 31,
2020 the borrowing capacity to remain in compliance with the consolidated
debt/EBITDA covenant was $1.43 billion. In June 2020
the RCF was further amended to adjust the calculations for cash interest
expense and total indebtedness for the 4 consecutive quarters from June
2020 through June 2021. This amendment allows the netting of proceeds
from senior note offerings to year-end December 31, 2020;
this can be extended through each of the March 2021 and June 2021 quarters
however post December 31, 2020, availability under the RCF
would reduce by 1/3 of the net proceeds from any such debt issuance.
The company has taken a number of actions to conserve liquidity including
the deferral of funding of the pension plan to January 2021 ($220
million) reduction in capital expenditures to $375 million and
other cost saving measures.
Alcoa's consolidated subsidiary, Alcoa of Australia Limited
(AofA part of the AWAC joint venture between Alcoa -- 60%
and Alumina Limited -- 40%) has received a notice from the
Australian Taxation Office (ATO) of additional income taxes due in the
amount of $147 million (A$214 million) excluding interest
or other penalties. In accordance with ATO dispute practices,
AofA will pay 50% or roughly $74 million of the assessed
additional tax amount in the third quarter of 2020. This can be
comfortably accommodated within the overall liquidity profile.
There are no material maturities until the revolver expires in November
2023.
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 spread of the coronavirus outbreak, deteriorating global
economic outlook, low oil prices, and high asset price volatility
have created an unprecedented credit shock across a range of sectors and
regions. 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 CFR.
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.
Alcoa Nederland is a wholly owned subsidiary of Alcoa Corporation.
Headquartered in Pittsburgh, PA, 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 AWAC joint venture
with Alumina Ltd (60% Alcoa/40% Alumina Limited).
Revenues for the twelve months ended March 31, 2020 were $10.1
billion.
The principal methodology used in this rating 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.
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
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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
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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,
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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
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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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
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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
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JOURNALISTS: 1 212 553 0376
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