New York, March 08, 2021 -- 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 subsidiaries. All other ratings, including the Speculative
Grade Liquidity Rating remain unchanged. The proceeds of the notes
along with balance sheet cash will be used to repay the outstanding amount
of the 6.75% senior unsecured notes due 2024, contribute
approximately $500 million to the U.S. defined benefit
pension plans and pay the associated fees and expenses.
Assignments:
..Issuer: Alcoa Nederland Holding B.V.
....Senior Unsecured Regular Bond/Debenture,Assigned
Ba1 (LGD4)
RATINGS RATIONALE
Moody's views the repayment of $750 million notes due 2024
and the $500 million prefunding of the U.S. pension
plan as credit positive. The transaction will effectively lead
to lower Moody's-adjusted leverage, extend the debt
maturity profile and reduce exposure to the volatility risk associated
with pension obligations, while allowing the company to maintain
its excellent liquidity position. Additionally, the pension
contribution is expected to eliminate the U.S. pension funding
requirement for about 3 years, enhancing the company's financial
flexibility.
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.
Alcoa is well positioned within its products and markets served.
Additionally, the company has a good cost production profile,
driven by the continued refocusing of its refining and smelting system,
reducing operating costs and streamlining the organizational structure,
selling non-core assets, curtailing its higher cost facilities
or working to reposition them lower on the global cost curve where possible.
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 continued
growth in China's smelting capacity, which has further exacerbated
the supply/demand imbalance in 2020 leading to the widening of the surplus
in the aluminum market.
The sharp rebound in Aluminum prices (LME) from the multi-year
lows seen in early 2020 to above the pre-pandemic levels,
has been driven by improving fundamentals, rebound in automotive
production, recovery in China's aluminum demand and output
in part due to significant infrastructure and construction stimulus programs,
as well as the investment fund positioning. However, Moody's
expects that aluminum prices will moderate from currently high levels.
Continued aluminum production growth in China in 2021 is expected to partially
offset the anticipated increase in global aluminum consumption,
leading to a more moderate but still significant market surplus in 2021.
Alcoa generated about $1.1 billion in Moody's-adjusted
EBITDA in 2020, lower than in the prior 3 years, mainly due
to the impact of coronavirus on global economy and aluminum demand,
particularly in 1H2020. Weaker earnings combined with higher absolute
levels of debt resulted in debt/EBITDA ratio, as adjusted by Moody's,
climbing to 3.9x at the year-end from 2.3x in 2019.
While the leverage is currently high for the rating, the repayment
of 2024 notes and higher projected EBITDA generation in 2021 is expected
improve the leverage to the range of 2.0-2.5x by
the end of 2021.
The stable outlook incorporates Alcoa's excellent liquidity position at
December 31, 2020 and anticipates that the company will remain focused
on its cash generation and completing its asset portfolio review to improve
its financial and operating performance. We expect Alcoa will benefit
from increased higher aluminum and alumina prices relative to 2020,
cost reduction measures and asset portfolio optimization initiatives.
Additionally, relatively low fuel input costs and benefits from
depreciated currencies in countries where Alcoa operates will provide
some mitigation.
The SGL-1 speculative grade liquidity rating acknowledges the company's
excellent liquidity as evidenced by its cash position of $1.6
billion at December 31, 2020 and its $1.5 billion
secured revolving credit facility (RCF -unrated) at Alcoa Nederland,
guaranteed by Alcoa and maturing in November 2023. We expect Alcoa
to generate free cash flow in the next 12 months. The revolver
had about $1.49 billion availability at December 31,
2020 after the use of $14 million in letters of credit.
There are no material maturities until the revolver expires in November
2023.
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 returning to 2.5x thereafter. The Consolidated
EBITDA/interest covenant requirement remained at no less than 5x.
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. Concurrently with the
transaction, the company entered into another amendment to the RCF
to increase the permitted maximum leverage to 2.75x from 2.5x
and lower the minimum interest coverage ratio requirement from 5x to 4x,
among other changes to provisions that will provide for higher debt capacity.
As of December 31, 2020, Alcoa was in compliance with all
covenants and we expect the company to remain in compliance in the next
12 to 18 months.
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.
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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Given the volatility in the commodities in which Alcoa participates and
potential for wide swings in performance, further upward rating
movement could be limited. 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 in 2021. Substantial negative
free cash flow 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.
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 December 31, 2020 were $9.3
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
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
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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.
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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_1243406.
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.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
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Please see www.moodys.com for any updates on changes to
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for additional regulatory disclosures for each credit rating.
Botir Sharipov
VP-Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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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
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