New York, July 26, 2022 -- Moody's Investors Service ("Moody's") upgraded the rating of Alcoa Nederland Holding B.V.'s ("ANHBV") senior unsecured notes to Baa3 from Ba1. At the same time, Moody's withdrew ANHBV's ("Alcoa") Ba1 Corporate Family Rating, Ba1-PD Probability of Default Rating and the SGL-1 Speculative Grade Liquidity Rating. The ratings outlook has been changed to stable from rating under review. This rating action concludes the review for upgrade initiated on 26 April 2022.
"The ratings upgrade to Baa3 reflects the improved competitiveness of Alcoa's refining and smelting system that will support its ability to generate strong earnings and positive free cash flow and help it sustain an investment grade credit profile at various aluminum, alumina and bauxite prices. Moody's views Alcoa's substantially strengthened balance sheet, excellent liquidity position and its financial policy as supportive of the investment grade rating", said Botir Sharipov, Moody's senior credit officer and lead analyst for Alcoa.
Ratings Upgraded:
..Issuer: Alcoa Nederland Holding B.V.
.... Gtd Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba1 (LGD4)
Ratings Withdrawn:
..Issuer: Alcoa Nederland Holding B.V.
.... Corporate Family Rating, Withdrawn , previously rated Ba1
.... Probability of Default Rating, Withdrawn , previously rated Ba1-PD
.... Speculative Grade Liquidity Rating, Withdrawn , previously rated SGL-1
Outlook Actions:
..Issuer: Alcoa Nederland Holding B.V.
....Outlook, Changed To Stable From Rating Under Review
RATINGS RATIONALE
The ratings upgrade is supported by a material improvement in Alcoa's credit profile, enabled by a successful and continued implementation of its strategic portfolio optimization program and balance sheet/pension liability management actions that significantly reduced its leverage, including the $1.5 billion annuitization and $500 million prefunding of U.S. gross pension liability in 2021. These actions along with historically high aluminum prices, regional and value-added product premiums have enabled Alcoa to achieve investment grade credit metrics. Alcoa's leverage, measured as Moody's-adjusted debt/EBITDA, declined to about 0.6x in the LTM ended on June 30, 2022, which is down significantly from FYE 2020's 3.9x and is a result of higher EBITDA and about $1.9 billion reduction in Moody's-adjusted debt.
Alcoa Nederland Holding B.V.'s Baa3 senior unsecured rating is supported by its parent's (Alcoa Corporation) 1) position as a leading producer of bauxite, alumina, and aluminum; 2) geographical and aluminum product diversity with 28 operations located in 9 countries; 3) low-cost bauxite and alumina operations in the 1st quartile and aluminum smelters in the 2nd quartile of the global cost curve, respectively; 4) upstream integration in the aluminum value chain that provides a natural hedge against the volatility in alumina and bauxite prices; 5) the improved competitiveness of the aluminum asset portfolio repositioned through high-cost capacity closures, curtailments and divestitures; 6) low reliance on fossil fuels with 81% of smelter electricity needs provided by renewable energy sources and long-term, predominantly LME aluminum price-linked, power purchase agreements that can cushion operating margin contraction during cyclical downturns; 7) substantial exposure to the US and Europe, two markets that rely heavily on aluminum imports and where Alcoa sells about 90% of its primary aluminum products benefiting from high regional and value-added product premiums; 8) excellent liquidity and 9) management team with proven operating track record and commitment to maintaining a strong balance sheet.
Alcoa's bauxite, alumina and aluminum operating costs have been increasing over the last few quarters, driven by high prices for energy (in large part due to high aluminum prices), natural gas, labor, freight and key raw material inputs such as caustic soda, calcined petcoke and coal tar pitch. As a result, Alcoa's average cost per metric ton of primary aluminum shipped, increased to $2,872/ton in Q2 2022 from $2,235/ton in 2021 and $1,883/ton in 2020. While LME aluminum prices have declined precipitously from recent record highs, they remain elevated and are supported by still solid aluminum demand, industry cost inflation and smelter curtailments in Europe and the US. Moody's expects that average operating costs of Alcoa's smelting system will have peaked in Q2 and Q3 2022 and will decline, albeit with a lag, in the next 3-9 months given the linkage between LME aluminum price and Alcoa's power costs, lower alumina prices as well as modestly lower anticipated costs for some of the raw materials, namely, caustic soda, calcined pet coke and coal tar pitch. This cost relief along with Moody's expectations for continued strength in the Midwest (MWP), the European Duty Paid (EDPP) regional premiums and value-added product premiums will continue to support the earnings and cash flow generation and enable Alcoa to maintain debt protection metrics commensurate with the investment grade rating.
Assuming the average LME aluminum price of $2,350/ton for H2 2022 and $2,200/ton for FY2023, MWP of $650/ton for H2 2022 and $500/ton for FY 2023, EDPP of $500/ton for H2 2022 and $400/ton for FY2023 (all below YTD averages and spot prices) as well as alumina price of about $370/ton and moderate cost deflation, Moody's estimates that Alcoa will generate Moody's-adjusted EBITDA in the range of $2.8-3 billion in FY2022 and $1.6-1.8 billion in FY2023. Under this base-case scenario, leverage is expected to remain under 1x in FY2022 and increase to about 1.3x in FY2023. Moody's expects Alcoa to generate substantial free cash flow in both years that could be used to further strengthen the balance sheet and for shareholder returns.
Alcoa has an excellent liquidity profile supported by a cash position of about $1.65 billion and a $1.25 billion undrawn unsecured revolving credit facility (RCF - unrated) at Alcoa Nederland Holding B.V., guaranteed by Alcoa Corporation (parent) and maturing in June 2027. The Company amended and restated the RCF in June 2022 reducing the size of commitments from $1.5 billion to $1.25 billion and extended the maturity date from November 2023 to June 2027. The amendment released the prior collateral package, subject to the company maintaining specific credit ratings, and provided additional flexibility for Alcoa to make restricted payments and investments and to incur unsecured and secured indebtedness, subject to pro forma compliance with the maximum leverage ratio and certain other terms. The financial covenants include a minimum interest expense coverage ratio of 4x and maximum leverage ratio of 3.25x, which will be replaced by a total maximum debt to capitalization ratio of 60%, subject to the company achieving an investment grade rating. The RCF also incorporates sustainability linked KPIs related to GHG emissions intensity and renewable energy consumption. Following the RCF extension, Alcoa has no material maturities until 2027.
The stable outlook reflects our expectations that aluminum market fundamentals will remain supportive of the company's investment grade credit profile, that Alcoa will remain focused on optimizing and repositioning its asset portfolio and sustaining its strong operating and financial performance over the next 12-18 months, continuing to generate robust earnings and positive free cash flow. The stable outlook also assumes that the company will remain financially disciplined with respect to capital expenditures and shareholder returns, preserve its excellent liquidity to mitigate the inherent aluminum price volatility. The outlook also assumes that Alcoa will maintain its strong balance sheet and debt protection metrics appropriate for a Baa3 rating.
As a primary aluminum producer, Alcoa, like the metals and mining industry as a whole, faces numerous environmental risks across all of its operations in the countries in which it operates. Regulations can vary widely and continue to become increasingly complex and stringent. The global mining industry is viewed as having very high environmental and high social risk. Alcoa is working to reduce the carbon intensity of its aluminum smelting business. Through its joint venture with Rio Tinto plc (A2 stable), the company helped create the first carbon-free aluminum. The company also expects that other portfolio changes will lower carbon dioxide emissions and anticipate that over time up to 85% of the smelter portfolio will be powered by renewable energy. Alcoa's CIS-3 Credit Impact Score (moderately negative) reflects the company's very highly negative exposure to environmental risks and highly negative exposure to social risks associated with operating bauxite mines, upstream tailings facilities, alumina refineries and aluminum smelters and its highly unionized workforce. These risks are somewhat balanced by neutral-to-low governance risk considerations. Alcoa has been disciplined in the allocation of its capital between shareholder returns, capital expenditures and balance sheet/liability management as evidenced by a significant reduction in Moody's-adjusted debt since 2020. Overall, the ESG risks do not have a material impact on the credit rating.
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. However, ratings could be upgraded if Alcoa demonstrates that is able to sustain an EBIT margin of at least 20%, EBIT/interest of at least 7x, debt/EBITDA under 2x and (CFO-dividends)/debt of at least 40% at various aluminum and alumina price scenarios. Continued discipline in its capital allocation strategy and financial policy would also be a consideration.
Negative pressure on the ratings could develop if the company experiences a prolonged decline in operating performance, profitability and cash flow generation resulting in negative FCF, weakening liquidity and deterioration in debt protection metrics. Any weakening of the company's balanced financial policy, shareholder distributions or capital spending significantly exceeding Moody's expectations, a pursuit of an aggressive business expansion or a material debt-financed acquisition that is deemed detrimental to its financial profile would also likely pressure the ratings. Quantitatively, we could downgrade the ratings if EBIT margin were to fall below 15%, if Moody's-adjusted debt/EBITDA were to rise above 2.75x on a sustained basis; if (CFO-dividends)/debt were to remain below 30% and EBIT/interest expense below 4.5x.
Alcoa Nederland Holding B.V. 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 June 30, 2022 were about $13.4 billion.
The principal methodology used in these ratings was Mining published in October 2021 and available at https://ratings.moodys.com/api/rmc-documents/76085. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
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Botir Sharipov
VP - Senior Credit Officer
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
Karen Nickerson
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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