New York, May 14, 2018 -- Moody's Investors Service, ("Moody's") upgraded
Alcoa Nederland Holding B.V.'s (ANHBV) Corporate Family
Rating (CFR) and Probability of Default Rating to Ba1 and Ba1-PD
respectively from Ba2 and Ba2-PD respectively and upgraded the
company's senior unsecured notes to Ba1 from Ba2. The notes
are guaranteed by Alcoa Corporation (Alcoa). In addition,
Moody's assigned a Ba1 rating to ANHBV's senior unsecured
notes due in May 2028. The speculative grade liquidity rating remains
unchanged at SGL-1. The outlook is stable.
Proceeds from the new note issue will be used to make contributions to
Alcoa's pension and other post retirement plans as well as for general
corporate purposes.
The upgrade of the CFR to Ba1 considers Alcoa's stronger operating
platform following rationalization over the last several years of its
alumina refining and aluminum smelting operations, expansion of
its bauxite platform, enhanced productivity gains, improved
value added mix as well as good performance at its cast houses.
Additionally the costs that have been taken out of the system over the
last several years has contributed to stronger margins and although cost
creep is negating some of the cost reduction benefits. "The
actions taken enable Alcoa to perform better in a down market and at lower
price points than currently exist relative to past performance"
said Carol Cowan, Senior Vice President and lead analyst for Alcoa.
Further support for the Ba1 CFR is derived from the company's well-articulated
capital allocation objectives, which includes maintaining cash balances
in excess of $1 billion.
Upgrades:
..Issuer: Alcoa Nederland Holding B.V.
.... Probability of Default Rating,
Upgraded to Ba1-PD from Ba2-PD
.... Corporate Family Rating, Upgraded
to Ba1 from Ba2
.... Gtd. Senior Unsecured Regular
Bonds/Debentures, Upgraded to Ba1(LGD4) from Ba2(LGD4)
Assignments:
..Issuer: Alcoa Nederland Holding B.V.
.... Gtd. Senior Unsecured Notes,
Assigned 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 solid cost production
profile, driven by continued refocusing of its refining and smelting
system and idling/closure of higher cost facilities. We expect
the company to generate EBITDA of at least $3 billion in 2018 on
stronger prices and higher premiums despite an expected cost creep of
around $400 million on higher caustic and carbon products.
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 and the volatility in
the alumina and aluminum markets 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. Although Chinese smelter capacity has been
curtailed due to illegal operations as well as environmental concerns
over the winter months, the potential exists for restarts,
particularly given current price environment. Additionally,
the imposition of tariffs in the US due to Section 232 findings,
has contributed to smelter restarts by certain companies. This
is not viewed as materially changing current market dynamics, given
the time required, but could have longer term implications.
Nonetheless, the stronger global economic growth levels and the
supply deficit in the US, where Alcoa derives a material portion
of its sales, provides underlying support to Alcoa's performance
over the next several quarters. Given our expectations for minimum
EBITDA of at least $3 billion in 2018 and considering only the
annuitization of the Canadian pension plan, and Alcoa's guidance
for discretionary pension plan contributions, we would expect leverage,
as measured by the debt/EBITDA ratio to be no more than 1.5x in
2018.
Moody's notes that the growth in EBITDA and cash flow generation
is also driven by the stronger performance in the bauxite and alumina
operations, all of which, as well as certain smelter facilities,
are part of the AWAC joint venture with Alumina Ltd. If such were
to be proportionately consolidated, 2017 segment EBITDA would be
roughly $2 billion versus $2,7 billion on a fully
consolidated basis while leverage would be around 2x versus the 1.8x
The stable outlook expects that Alcoa will exhibit strong earnings growth
and cash flow generation over the next several quarters due to unusual
market conditions, but anticipates that the company will be able
to maintain metrics appropriate for a Ba1 profle, particularly for
interest coverage, profit margins and free cash flow generation
once the uncertainty in the market is resolved. The stronger performance
in an upmarket is expected to provide the company with a better cushion
to protect it against varying price points for its key operating segments.
The SGL-1 speculative grade liquidity rating acknowledges the company's
excellent liquidity as evidenced by its cash position of $1.2
billion at March 31, 2018 and its $1.5 billion secured
revolving credit facility (RCF -unrated) at Alcoa Nederland,
guaranteed by Alcoa and maturing in November 2022. The facility
is unused except for around $100 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 2.25x (Moody's
leverage ratios include our standard adjustments for pensions and operating
leases). Additionally, the company has no material debt maturities
until September 2024.
Alcoa is expected to be free cash flow generative in 2018 after maintenance
and growth capital expenditures of $450 million.
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.
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 fall and be sustained
below 4.5x EBIT margins be less than 8%, leverage
exceed and be sustained above 2.75x. Negative free cash
flow and liquidity contraction would also be a downgrade consideration.
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 and Alcoa Inc's 25.1% interest in the Ma'aden
Rolling Company. Revenues for the twelve months ended March 31,
2018 were $12.1 billion.
The principal methodology used in these ratings was Mining Industry published
in April 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
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: 1 212 553 0376
Client Service: 1 212 553 1653
Brian Oak
MD - Corporate Finance
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
