DBRS Downgrades Arconic Inc.’s Ratings to BBB (low) and Changes Under Review Status to Negative from Developing

DBRS Limited (DBRS) has today noted the name change of Alcoa Inc. (Alcoa) to Arconic Inc. (Arconic), to which all current ratings have been transferred. Concurrently, DBRS has downgraded Arconic’s Issuer Rating and Senior Unsecured Debt rating to BBB (low) from BBB, following the completion on November 1, 2016, of the planned separation of Alcoa Inc. into Alcoa Corporation (AC; a separate company that produces bauxite, alumina and aluminum products) and Arconic Inc. (Arconic; which manufactures engineered products and solutions, rolled products and transportation products and solutions).

Management indicated that Arconic expects to generate approximately two-thirds of the previous Alcoa’s earnings and cash flow while assuming essentially all of Alcoa’s debt ($9.1 billion as at June 30, 2016). DBRS expects Arconic’s financial metrics to be materially weaker compared with Alcoa’s historical levels. Based on 2015 audited financial figures and those contained in Form 10 issued by Alcoa on June 29, 2016, DBRS estimates that Arconic’s pro forma adjusted debt-to-EBITDA could range between 4.5 times (x) and 5.0x, while pro forma adjusted cash flow-to-debt could range between 15% and 20% compared with 3.0x and 30%, respectively, for Alcoa. If these financial metrics materialize, they would not support Alcoa’s current rating and would be more consistent with levels expected of ratings in the BB range. As raw materials, in particular metals, are expected to be a material component of Arconic’s operating cost structure, DBRS will assess Arconic’s future sourcing of metal from AC and other suppliers, as well as the extent to which and when Arconic can pass on increased metal costs to its customers, as part of the review of Arconic’s post-separation operating cost efficiency and profitability.

While DBRS expects Arconic’s business risk assessment to remain strong in view of favourable demand conditions and Arconic’s strong market position, the one-notch downgrade of the ratings to BBB (low) reflects the materially weaker estimated financial metrics. Future leverage reduction, with available cash resources and possible liquidation of its 19.9% equity interest in AC, is needed to support an investment-grade rating. DBRS has maintained the Under Review status for the ratings, as it is seeking clarification from Arconic with respect to Arconic’s operations, business relationships with AC and future financial plans and the path toward deleveraging to determine the final rating outcome. However, in changing the Under Review status to Negative from Developing, DBRS considers that Arconic’s ratings could be further pressured and will require meaningful debt reduction effort to support.

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 Industrial Products Industry (April 2016) and Rating Companies in the Mining Industry (September 2016), which can be found on our website under Methodologies.

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

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