DBRS Assigns Provisional Pfd-3 Rating to Alcoa Preferred Share Issue

DBRS has today assigned a provisional rating of Pfd-3 with Negative trend to up to $1.4 billion of the Class B mandatory convertible preferred shares, Series 1 (the new Alcoa preferred shares) to be issued by Alcoa Inc. (Alcoa or the Company) as part of the financing of the Company’s $2.85 billion Firth Rixson Limited (Firth Rixson) acquisition and related fees and expenses.

DBRS confirmed Alcoa’s Issuer Rating and Senior Unsecured Debt rating of BBB, as well as the Commercial Paper rating of R-2 (middle), maintaining these ratings with a Negative trend, on June 30, 2014, following the Company’s announcement that it had signed a definitive agreement to acquire Firth Rixson (see “DBRS Confirms Alcoa Ratings at BBB with Negative Trend Following Announcement of Plan to Acquire Firth Rixson for $2.9 Billion,” June 30, 2014) indicating, “… 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.”

At that time, Alcoa contemplated the issuance of $500 million in Alcoa common stock, plus a combination of debt and equity-content securities, to fund the remaining $2.35 billion portion of the Firth Rixson purchase price. The new Alcoa preferred shares represent the “equity-content securities” portion of the Firth Rixson acquisition financing. A new senior unsecured debt issue to fund the remainder of the cost is also expected.

The new Alcoa preferred shares are expected to have a three-year term with mandatory conversion to equity in 2017. Dividends payable on the new Alcoa preferred shares will be payable in cash or, at Alcoa’s option, Alcoa common shares (subject to certain limitations). On the mandatory conversion date, the new Alcoa preferred shares will be automatically converted to Alcoa common stock. The new Alcoa preferred shares will rank senior to Alcoa common stock, on parity with other Alcoa Class B stock, junior to Alcoa Class A stock and junior to Alcoa existing and future indebtedness.

The Firth Rixson acquisition transaction remains subject to customary conditions and receipt of regulatory approvals, and is expected by Alcoa to close by the end of 2014. The issuance of the new Alcoa preferred shares is not contingent on the completion of the Firth Rixson acquisition, which, if completed, will occur subsequent to the closing of the issuance of the new Alcoa preferred shares. If the Firth Rixson acquisition is not completed on or before April 1, 2015, or if an acquisition termination event (as defined in the prospectus supplement related to the new Alcoa preferred shares) occurs, Alcoa, at its option, will have the right, but not the obligation, to redeem new Alcoa preferred shares, in whole but not in part, at a specified price.

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.

DBRS can be expected to finalize its rating of the new Alcoa preferred shares once the issuance is complete.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated 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 Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.