Fitch Ratings has affirmed the ratings for Alcoa Inc. (NYSE: AA, Alcoa)
including its Issuer Default Rating and senior unsecured debt at 'BB+'.
Nearly $14 billion in commitments and securities are affected. A full
list of rating actions follows at the end of this release.
The Rating Outlook has been revised to Positive from Stable in
recognition of permanent improvements to the company's business profile,
including expansions into higher value added downstream segments
Engineered Products and Solutions (EPS) and Global Rolled Products
(GRP), and reduced exposure to higher volatility primary aluminum
markets. Alcoa has also increased its focus on reducing financial
leverage.
KEY RATING DRIVERS
The ratings reflect Alcoa's leading positions in aluminum, key
aerospace, automotive and construction markets, strong control of costs
and spending, and the flexibility afforded by the scope of its
operations. Alcoa benefits from being vertically integrated and
geographically diversified. The company has generated free cash flow
after capital expenditures and dividends to shareholders since 2010
despite weak aluminum prices. Profitability remains leveraged to
aluminum prices but less so than prior periods given cost reductions and
higher value-added production.
Benefits from Upstream Reviews
Alcoa ranked as the third largest western primary aluminum producer in
2014 after Rio Tinto and Rusal. Its aluminum production is in the second
quartile of the global cost curve and its alumina production is in the
first quartile. Roughly 64% of alumina and 81% of primary aluminum by
volume was sold to third parties in 2014. The physical primary aluminum
market has reached a balance over the last couple of years but
substantial stocks remain in the hands of financial buyers which limits
price appreciation.
In 2014 Alcoa took 159,000 tonnes (t) of smelter capacity offline, sold
its share (115,000 t) of the Mt. Holly smelter, and permanently closed
424,000 t of capacity. In March 2015, Alcoa announced a review of
500,000 t of smelting capacity and 2.8 million t of alumina refining
capacity for possible curtailment, closure or sale. Of the company's 3.5
million t of smelting capacity, 19% was curtailed at Dec. 31, 2014.
Global consumption was about 53 million t in 2014 and LME stocks were
3.9 million t at April 9, 2015.
Fitch believes that the strong dollar and low oil prices will continue
to inform aluminum prices and that Western producers will show
production discipline. Inventory financing transactions are expected to
continue to slowly unwind as interest rates rise. Longer-term, Fitch
expects the market to benefit from a dearth of new investment and
declining stocks although price appreciation will be constrained by
excess capacity currently idled.
On the margin and all else equal, Alcoa reports that a $100/t increase
or decrease in the average price of primary aluminum as reported on the
London Metal Exchange (LME) would increase or decrease 2015 annual net
income by $190 million (a drop of $50 million from 2014's sensitivity).
In 2014, the LME price was about $21/t higher, Alcoa's average realized
prices for primary aluminum were $162/t higher, and the Primary Aluminum
segment EBITDA/t was $355 higher than the same figures for 2013.
Alumina markets have their own fundamental dynamics and Alcoa has been
working to move its contracts to indexed base pricing rather than
pricing based on the LME price of aluminum. For 2015, roughly 75% of
third party shipments are on spot or alumina index based.
Downstream Opportunities:
Engineered Products and Solutions (EPS) and Global Rolled Products (GRP)
benefit from scale in research and development, past restructuring
efforts, and growing end-market demand.
Since 2009, EPS segment annual EBITDA more than doubled to $1.3 billion
and accounted for 37% of 2014 consolidated operating EBITDA and EPS
taken with GRP accounted for 57%. Recent investments in GRP have
captured growing auto and aerospace demand while some uneconomic can
sheet plants have been divested or closed. In EPS, the recent
acquisitions of Firth Rixson and Tital as well as the anticipated
acquisition of RTI International Metals, Inc. expand Alcoa's exposure to
high growth aerospace markets. Fitch estimates that EPS and GRP will
represent more than $2.7 billion in EBITDA in 2016 -- well over 50% of
our projected base case EBITDA.
Expectations:
Fitch expects 2015 EBITDA to be at least $3.6 billion and total debt to
EBITDA to be at most 2.3x. FFO adjusted leverage is impacted by minimum
pension contributions in the amount of $485 million in 2015. Fitch
expects FFO adjusted leverage to drop below 3x after 2015. Based on
preliminary LTM March 31, 2015 figures, EBITDA was $4.0 billion, total
debt to EBITDA was 2.2x and FFO adjusted leverage was 3.1x.
For 2015, Fitch expects Alcoa to be free cash flow positive after
capital expenditures of $1.4 billion, $220 million in dividends and the
$300 million prepayment associated with the gas supply agreement in
Western Australia announced April 8, 2015.
Strong Liquidity:
At Dec. 31, 2014, the $4 billion revolver maturing July 25, 2019 was
fully available and, at March 31, 2015, cash on hand was $1.2 billion.
The revolver has a covenant that limits Consolidated Indebtedness to
150% of Consolidated Net Worth. Fitch notes that the first quarter
generally shows high seasonal working capital; a key focus is working
capital management and turns have been kept to low levels. Fitch expects
seasonal working capital borrowings to be cleaned down in the third
quarter of 2014.
As of Dec. 31, 2014, near-term scheduled debt maturities were: $29
million in 2015, $28 million in 2016, $767 million in 2017, $1 billion
in 2018 and $772 million in 2019.
Pension Contributions:
According to the company's form 10K, at Dec. 31, 2014, aggregate pension
plans were underfunded by $3.3 billion, of which the U.S. pension plans
were underfunded by $2.7 billion on a U.S. GAAP basis. The minimum
required contribution to pension plans is estimated to be $485 million
in 2015.
KEY ASSUMPTIONS:
--EPS is expected to benefit from the recent acquisitions of Firth Rixon
and Tital as well as internal growth;
--RTI International acquisition is not included in projections but is
expected to be a stock-for-stock transaction and contribute to lower
financial leverage when closed; and
--Fitch's LME aluminum price assumptions of $1,900/t, average market
premiums of $350/t, and alumina prices of $321/t for the full year 2015.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively,
lead to positive rating action include:
--FFO adjusted net leverage sustainably under 2.5x - 2.75x, and FCF
positive on average;
--Managing to the lower end of management's target leverage range of
Total Debt/EBITDA of 2.25x - 2.75x.
--EBIT margins of at least 8% on average.
Negative: Not anticipated but, future developments that may,
individually or collectively, lead to negative rating action include:
--Operating EBITDA below $3 billion in 2015;
-- FFO adjusted net leverage sustainably above 3x and free cash flow
negative in the amount of $200 million or more on average.
Fitch has affirmed the following ratings with a Positive Outlook:
--Issuer Default Rating (IDR) at 'BB+';
--Senior notes at 'BB+';
--$4 billion revolving credit facility at 'BB+';
--Series A preferred stock at 'BB-';
--Series B preferred stock at 'B+';
--Short-term IDR at 'B';
--Commercial paper at 'B'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (May 2014);
--'Updating Fitch's Mid-Cycle Commodity Price Assumptions' (July 2014);
--'US Aluminum Dashboard' (Aug. 5, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Updating Fitch -- Mid-Cycle Commodity Price Assumptions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749419
U.S. Aluminum Dashboard
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754467
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983109
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