DBRS Confirms Alcoa Ratings at BBB with Negative Trend Following Announcement of Plan to Acquire Firth Rixson for $2.9 Billion

DBRS has today confirmed the BBB Issuer Rating and Senior Unsecured Debt rating, and the R-2 (middle) Commercial Paper rating of Alcoa Inc. (Alcoa or the Company) and has maintained the ratings with a Negative trend, following the Company’s announcement that it has signed a definitive agreement to acquire Firth Rixson Limited (Firth Rixson), a provider of rings, forgings and specialty metals primarily to the aerospace industry, for $2.85 billion plus a potential $150 million earn-out through 2020. DBRS views the Firth Rixson acquisition as a material one, but one that will have a moderate and largely neutral impact on the Company’s business profile and financial metrics. Accordingly, DBRS has maintained its Alcoa ratings on a Negative Trend where they were place in July 2013 (see “DBRS Changes Trend on Alcoa Ratings to Negative from Stable July 18, 2013”).

In terms of the Firth Rixson transaction, Alcoa indicates that it has agreed to pay for the $2.85 billion portion of the acquisition with $500 million in Alcoa common shares and a combination of debt and equity-content securities to fund the remaining $2.35 billion portion of the purchase price. The $150 million earn-out portion of the price will be only payable if earnings from Firth Rixson reach certain levels over a period of time. The acquisition transaction remains subject to customary conditions and receipt of regulatory approvals, and is expected by Alcoa to close by the end of 2014.

DBRS views the acquisition of Firth Rixson as an enhancement to the aerospace component of Alcoa’s existing Engineered Products and Solutions business, which already produces multi-material products such as investment castings, forgings and fasteners, aluminum wheels, integrated structural systems and architectural extrusions used in the aerospace, building and construction, commercial transportation and power generation markets. Firth Rixson currently holds the leading global position in seamless rolled jet engine rings engineered from nickel-based super-alloys and titanium, and is a major supplier of jet engine forgings. It also has a significant investment in isothermal forging.

From a financial perspective, Alcoa indicates that a significant portion of the Firth Rixson transaction will be funded by equity (initially $500 million) or equity-content securities with a debt component expected by DBRS to be largely in line with the Company’s existing financial structure. At March 31, 2014, Alcoa had $7.7 billion in total debt and 35% of debt in its overall capital structure. In commenting on the acquisition, the Company indicated, “The acquisition will be supported by a fully committed bridge facility from Morgan Stanley. Alcoa will subsequently issue a prudent combination of debt and equity-content securities and remains committed to maintaining its investment grade-rating”. In addition, Alcoa projects the acquisition will contribute $350 million to Alcoa’s earnings before interest, depreciation and amortization in 2016, including $40 million of synergies in year two, with a run-rate of $100 million by year five following the acquisition in cost savings as a result of purchasing and productivity improvements, optimizing internal metal supply and leveraging global shared services. This outlook is dependent on significant growth in Firth Rixson’s existing business.

In summary, the Firth Rixson acquisition, if it is financed and closed as currently anticipated, is expected to have a neutral impact on the Company’s ratings in the near to medium term. Accordingly, DBRS has maintained Alcoa’s ratings at BBB with a Negative Trend.

Alcoa continues to be challenged to stabilize its financial metrics with what DBRS sees as a general weakness in world commodity markets, including aluminum, and heightened price volatility in the near to medium term. These concerns were reflected in the first quarter of 2014 where Alcoa’s results from its operating units were mixed and large working capital needs resulted in a $114 million increase in net debt levels.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Deignated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Mining Industry (primary) and Rating Companies in the Industrial Products Industry (secondary), which can be found on our website under Methodologies.