Fitch Assigns 'B+' to Alcoa's Mandatory Convertible Preferred Stock

CHICAGO--()--Fitch Ratings has assigned a 'B+' rating to Alcoa Inc.'s (Alcoa) offering of $1.25 billion in three-year mandatory convertible preferred stock. The offering is being used to help fund the previously announced acquisition of Firth Rixson which is expected to close in the fourth quarter. Fitch currently rates Alcoa's long-term Issuer Default Rating (IDR) 'BB+'. The Rating Outlook is Stable. A full list of Alcoa's ratings is at the end of this release.

KEY RATING DRIVERS

Alcoa's ratings reflect its leading position in the aluminum industry, its strength in low-cost alumina production, the operating flexibility afforded by the scope of its operations and its moderately levered financial profile. Alcoa was ranked as the third largest primary aluminum producer in 2013. Its aluminum production is about average cost and its alumina production is in the low second quartile. Profitability has been hampered by global oversupply in aluminum in the upstream segment of the business and has weighed on net income and cash flow generation over the last few years.

On the downstream side of the business, Alcoa has been experiencing solid profitability and has been directing its focus on its presence there. The acquisition of Firth Rixson is an example of this focus as it will immediately add to Alcoa's existing aerospace segment and will provide a platform for future growth in that segment. Similarly, Alcoa's recent multi-year agreement with Boeing for approximately $1 billion that will supply the aerospace company with aluminum sheet and plate products emphasizes Alcoa's focus on its well performing downstream businesses. The agreement is positive for the aluminum producer as it locks in future revenue for its aerospace unit.

THE ISSUANCE

The issuance of the three-year mandatory convertible preferred stock (series B) will be subordinate to Alcoa's existing series A preferred stock and will thus be rated a notch below it. The dividend is subject to a cumulative deferral feature at the company's option and can be paid in cash and/or stock.

FREE CASH FLOW (FCF) & EXPECTATIONS

Alcoa's financial leverage will remain above 2.5x on a total debt/EBITDA level and above 3.5x on a funds from operations (FFO) adjusted level through the end of 2014. Significant pension contributions will keep FFO adjusted leverage above 3.5x through 2015. The company has generally produced FCF after capital expenditures and dividends to shareholders since 2010 despite weak aluminum prices. In 2014, Fitch expects the company to be FCF neutral after capital expenditures of $1.2 billion but before $137 million in dividends and the $125 million investment in the Ma'aden joint venture.

LIQUIDITY

Liquidity is provided by the company's $4 billion revolver maturing July 25, 2017, its commercial paper program and its 11 additional revolving credit facilities with separate financial institutions providing a combined capacity of $1.25 billion. Additionally, cash and cash equivalents on hand were $1.18 billion as of June 30, 2014. The main revolver has a covenant that limits Consolidated Indebtedness to 150% of Consolidated Net Worth as do the other 11 revolvers.

RATING SENSITIVITIES:

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Operating EBITDA below $2.5 billion in 2014;

--Total debt/EBITDA sustainably above 3.0x and FCF negative in the amount of $200 million or more.

Positive: Not anticipated over the next 12 months but future developments that may lead to a positive rating action include:

--FFO adjusted leverage to be under 2.5x, and FCF positive on average.

Fitch currently rates Alcoa as follows:

--Issuer Default Rating (IDR) 'BB+';

--Senior unsecured debt 'BB+';

--$4 billion revolving credit facility 'BB+';

--Series A preferred stock 'BB-';

--Short-term IDR 'B';

--Commercial paper 'B'.

Fitch rates Alcoa's Series B mandatory convertible preferred stock at 'B+'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--Alcoa's Ratings Unaffected by Acquisition Announcement (June 26, 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

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=873754

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Contacts

Fitch Ratings
Primary Analyst
Sean T. Sexton, CFA, +1-312-368-3130
Managing Director
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst
Monica M. Bonar, +1-212-908-0579
Senior Director
or
Committee Chairperson
William Densmore, +1-312-368-3125
Senior Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Sean T. Sexton, CFA, +1-312-368-3130
Managing Director
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst
Monica M. Bonar, +1-212-908-0579
Senior Director
or
Committee Chairperson
William Densmore, +1-312-368-3125
Senior Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com