NEW YORK--(BUSINESS WIRE)--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.
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.
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.
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.
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.
--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.
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
Updating Fitch -- Mid-Cycle Commodity Price Assumptions
U.S. Aluminum Dashboard