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Rating Action:

Moody's upgrades Alcoa Nederland (CFR to Ba1), rates new debt; outlook stable

14 May 2018

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

No Related Data.
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