S&P: Alcoa Inc. 'BBB-/A-3' Ratings Affirmed On Announced Separation And Renaming; Outlook Remains Stable
Once Alcoa Inc. completes the separation and is renamed Arconic, we expect to transfer the ratings to Arconic.
The rating action follows Alcoa Inc.'s announcement that it is splitting its upstream and downstream businesses into two separate entities named Alcoa Upstream Corp. (Alcoa Corp.) and Arconic, respectively. Arconic will be the new name for Alcoa Inc. "We have reviewed the implications of the proposed business separation and its impact on the pro forma Arconic and expect no changes to our ratings on Alcoa Inc.," said S&P Global Ratings' credit analyst William Ferara. We expect that Arconic will have the same ratings as Alcoa Inc., which include the 'BBB-/A-3' corporate credit ratings and 'BBB-' senior unsecured rating. We expect the separation of the businesses and the transfer of the debt ratings to Arconic to be completed by year-end 2016.
"The stable outlook on Alcoa Inc. (and subsequently on Arconic) reflects our view that both companies' credit metrics will remain commensurate with a significant financial risk profile over the next two years," said Mr. Ferara. "We expect that Arconic will maintain adjusted debt to EBITDA of 3.5x-4x, a strong competitive position, and exceptional liquidity in 2016 and 2017."
We could lower our corporate credit rating on Alcoa Inc. (at that time, Arconic) after the split if the company's operating results experience meaningful pressure or if it adopts more aggressive financial policies. This could occur if the company's competitive position weakens or if its product volumes decline due to economic conditions or weakness in the automotive or aerospace markets. Specifically, we could lower the rating after the split if we expect the company's debt to EBITDA to be above 4x or its FFO to total debt to remain below 20% for a prolonged period.
We could raise the rating after the split if market conditions allow the company to generate substantial cash flow, reduce debt, and improve its credit measures with a solid track record. Specifically, an upgrade could occur if the company's sustains its credit measures at stronger levels--more in-line with similarly rated peers, such that its adjusted debt to EBITDA is notably less than 3x and its FFO to debt is greater than 30%.