Photographer: Stephen Morton/Bloomberg

Alcoa Investors Looking for More Answers to $13 Billion Question

  • Company is scheduled to release statement before trading Wed.
  • CEO plans to secure approvals, financing for split by yearend

Alcoa Inc. investors are hoping for more detail Wednesday on how the biggest U.S. aluminum producer will divide about $13 billion of liabilities as it prepares to split itself into two.

The question of how Alcoa’s more than $8 billion in debt and $5 billion in pension liabilities will be split among the companies is key to determining the value of the spin-offs. That will show whether Chief Executive Officer Klaus Kleinfeld can achieve his target of an investment-grade manufacturing company, renamed Arconic, and a viable aluminum-producing company retaining the Alcoa name.

Alcoa is scheduled to release before the start of regular trading Wednesday the divided companies’ legal, capital and governance structure and plans for allocating assets and liabilities. On Sept. 29, the day after the split was announced, Alcoa said it intended for the combined company’s debt to be retained by Arconic.

Alcoa is now split-rated, with Moody’s assigning it Ba1, the highest junk ranking, and S&P rating it BBB-, the lowest investment-grade. Creating an investment-grade company that keeps the parent’s debt and achieves the targets laid out by Kleinfeld won’t be easy with the price of aluminum down more than 50 percent from a 2008 peak and the split plan creating two smaller, less diverse entities.

‘In Limbo’

“With the outlook for its business if anything weaker than it was last October, I still don’t see how it can create one good junk and one investment-grade company,” Carol Levenson, an analyst at Gimme Credit, said in an e-mail on Monday. “It’s been a long time since the split was announced, with bondholders in limbo for the entire time as to what kind of company will be owing them money when the dust clears.”

By the end of the year, Kleinfeld plans to complete the final steps of securing board approval and financing for the split. He will separate the companies’ IT systems and other infrastructure, leaving a standalone aluminum producer that will retain the Alcoa name along with its mining, energy and casting assets. He will remain CEO of Arconic, a company that keeps the 128-year-old parent company’s legal identity, and chairman of the spun-off smelting company.

‘More Targeted’

The two companies “will offer investors more targeted investment opportunities and attract an investor base best suited to its own unique value proposition, operational and financial characteristics,” Monica Orbe, an Alcoa spokeswoman, said Tuesday.

The median debt-to-Ebitda ratio of industrial companies rated BBB- is 2.63, according to data compiled by Bloomberg Intelligence. Arconic’s Ebitda for the last 12 months was about $2 billion, according to Alcoa’s first-quarter earnings presentation on April 11. 

So for Arconic to match the median ratio of the lowest investment-grade peers, it wouldn’t be able to have more than about $5.3 billion of debt, before accounting for $647 million in corporate expenses, according to Bloomberg calculations.

“It’s going to be interesting to see if they’re able to pull off what they’re trying to pull off,” Richard Bourke, a credit analyst at Bloomberg Intelligence, said in an interview Tuesday. “With the Ebitda going down, it’s going to be even tougher.”

Ratings companies consider factors beyond debt ratios, including industry outlook and debt repayment plans, as guidelines to assess credit ratings.

The company’s bonds have returned 3.9 percent since last year’s split announcement, less than half of the average gain by debt issued by mining and metals companies. Its shares are up about 2.5 percent in the same period, compared with a 13 percent average increase by miners and a 4.6 percent advance by the S&P 500 Index.

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