DBRS Confirms Arconic Inc. at BBB (low) with a Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Arconic Inc. (Arconic or the Company) at BBB (low) with Stable trends. With this action, Arconic’s ratings are removed from their Under Review with Negative Implications status. Today’s confirmation reflects Arconic’s fairly robust business risk profile, the significant deleveraging actions taken by Arconic since the November 2016, the separation of Alcoa Inc. into two distinct businesses (the Separation) and the Company’s ability to further reduce debt. The ratings are supported by Arconic’s leadership positions in the majority of its product lines, the favourable economic drivers underpinning demand in key end markets, the relatively high barriers to entry, including proprietary technologies in some manufacturing processes, and the Company’s demonstrated ability to improve operating margins over time. Structural challenges include exposure to cyclical end markets and the volatility of input costs, especially aluminum. DBRS notes that Arconic’s financial profile is currently relatively weak but anticipates material improvement in the years ahead given additional debt reduction and improved operating results.

Before the Separation, Alcoa Inc. had been publishing financial data on its Value Add business, largely representing the businesses that would become Arconic. Between 2008 and 2015, this business’s adjusted EBITDA grew by 7.5% CAGR to $2 billion. EBITDA margin almost doubled to 14.8% from 7.8% as the Company exited lower margin businesses, acquired higher-margin operations such as specialty parts manufacturers with significant aerospace exposure, grew organically and benefited from technological advancements. In the last 12 months to June 30, 2017, the Arconic businesses continuing from the Value Add business delivered EBITDA of $1.75 billion, a 25% improvement compared with F2015, supported by acquisitions.

DBRS expects that Arconic’s exposure to faster-growing, higher-margin end markets such as commercial aerospace will enable the Company to continue to deliver steady EBITDA gains. After the Separation, Arconic pursued aggressive deleveraging goals. In H1 2017, the Company reduced debt by $1.25 billion and could reduce debt further. DBRS expects that the combination of lower debt and improving operating results will allow for certain key credit metrics to improve to investment-grade levels in 2018, with all key coverage metrics achieving investment-grade levels by 2019.

While DBRS does not foresee an upgrade in the near term, over the long term, if Arconic continues to develop its depth and breadth of higher-margin and growth product lines and demonstrates a commitment to a lower normalized run-rate leverage level, DBRS could consider a positive rating action. Should Arconic deviate from its current commitment to strengthening the balance sheet, for example via debt-financed acquisition activity, DBRS may consider a negative rating action.

Notes:
All figures are in US 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 principal methodology is Rating Companies in the Industrial Products Industry, which can be found on dbrs.com under Methodologies.

This rating is no longer endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.