Alcoa Bonds Rally Most in Year as Company Explains Debt Plans

  • Says it intends debt to be retained by value-add company
  • Investors were unsure how much would end up at each company

Alcoa Inc. headed for its best day in the bond market in at least a year as the company moved to ease concern that creditors would be left with a less attractive part of the businesses in a plan to split itself in two.

The biggest U.S. aluminum maker’s $1.25 billion in notes due 2024 surged 12.75 cents on the dollar at 9:43 a.m. in New York, the biggest gain since they were sold a year ago. That narrowed the spread, or extra return investors demand over U.S. treasuries, to 360 basis points from 561 basis points on Monday when the split plan was announced.

The bonds had plunged after the company’s initial announcement left investors unsure how much of Alcoa’s $8.7 billion of debt would end up at each company. The rebound came after the New York-based company said debt would be retained by the as-yet-unnamed manufacturing company.

“Alcoa’s current intent is that the debt of Alcoa would be retained by the value-add company for which Alcoa is targeting an investment grade rating,” it said in a statement distributed late Tuesday.

Yields and volumes spike on Alcoa's bonds swing
Yields and volumes spike on Alcoa's bonds swing

Alcoa plans to break itself up by separating manufacturing operations from its legacy metal-producing business. The resulting company comprising Alcoa’s downstream production assets generated about $2.2 billion of the company’s earnings before interest, taxes, depreciation and amortization in the 12 months ending June 30, the company said Monday. The name Alcoa will be retained by the mining, refining and smelting business, which generated $2.8 billion of Ebitda.

Alcoa is still working on the corporate structure to be used in the separation transaction. While the upstream company can operate under the Alcoa name, the value-add company retains the legal identity of the existing Alcoa, it said.

Alcoa’s follow-up statement “may make debt investors feel better, but they’d probably feel the best not having the split-off because they’ve got all of the Ebitda to service the debt,” Jeff Golman, head of investment banking for Chicago-based Mesirow Financial Inc., said in an interview Tuesday.

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