DBRS Assigns Provisional BBB Rating to Alcoa New Debt Issue, Negative Trend

DBRS has today assigned a provisional rating of BBB with a Negative trend to the senior unsecured notes (New Notes) 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. Alcoa will be required to redeem the New Notes, in whole but not in part, if the Firth Rixson acquisition does not proceed prior to April 1, 2015. DBRS will finalize the rating of the new notes once they are priced and if the terms are consistent with those of Alcoa’s preliminary prospectus supplement dated September 16, 2014, to its base shelf prospectus dated July 30, 2014.

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 issuance of Alcoa’s Class B mandatory convertible preferred shares, Series 1 representing the “equity-content securities” portion of the Firth Rixson acquisition financing has been launched and DBRS has provisionally assigned these shares a Pfd-3 rating (see, “DBRS Assigns Provisional Pfd-3 Rating to Alcoa Preferred Share Issue,” September 17, 2014). The New Notes represent the expected debt portion of the Firth Rixson transaction.

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. Alcoa will be required to redeem the New Notes, in whole but not in part, if the Firth Rixson acquisition does not proceed prior to April 1, 2015.

The senior indenture, the senior debt securities and the coupons related to the New Notes will be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania, except to the extent that the United States Trust Indenture Act of 1939 (as amended) applies.

The New Notes will be general unsecured obligations of Alcoa that will rank senior in right of payment to any of Alcoa’s future indebtedness that is expressly subordinated in right of payment to the New Notes and equally in right of payment with all of Alcoa’s existing and future unsecured indebtedness and liabilities that are not so subordinated.

The New Notes will effectively rank junior to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness and will be effectively subordinated to all debt and other liabilities of Alcoa’s subsidiaries. As at June 30, 2014, approximately $620 million of Alcoa’s $8.1 billion total consolidated indebtedness was to third parties of its subsidiaries and is structurally senior to the New Notes because that amount of debt consists of obligations at the subsidiary level.

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.

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 methodology is Rating Companies in the Mining Industry (primary) which can be found on our website under Methodologies.

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

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