Alcoa to Ease Manufacturing Company’s Debt Burden in Split

  • Arconic will hold up to 19.9% stake in the new Alcoa
  • Upstream company Alcoa Corp. will borrow about $1 billion

Alcoa Inc. said the aluminum smelting business it’s spinning off will take on $1 billion in new debt to help reduce the burden on the remaining company as it battles to maintain credit ratings.

After announcing the split in September, Alcoa said the engineering and fabricating company, to be called Arconic, would carry all of its debt, which stood at $9 billion at the end of March. In a filing Wednesday, it said the new mining and smelting company, which will retain the Alcoa name, will pass on “a substantial portion” of the $1 billion in new debt to help Arconic with its burden. The new Alcoa will also shoulder almost half the pension obligations.

The division of liabilities is critical in determining whether Klaus Kleinfeld, Alcoa’s chief executive officer and chairman, will be able to execute on his plan to create a self-sufficient metal-producing company and achieve an investment-grade credit rating at the industrial company that will remain. Speaking on a conference call today, Kleinfeld said the target is now for Arconic to at least retain Alcoa’s ratings, which are split between one investment-grade and two junk levels.

Alcoa shares fell 2.5 percent at 10:24 a.m. in New York. Its bonds due 2024 jumped 5 percent to 101.2 cents on the dollar, heading for the steepest gain since the days after the split announcement.

If the full $1 billion were returned to Arconic for debt repayment, it would end up with about $7.8 billion of the current company’s total debt. Arconic will maintain the current company’s legal identity in a split that’s scheduled to proceed by the end of the year.

Pension Obligations

Alcoa described the allocation of liabilities in a filing today. Each business will maintain a presence in New York, where Alcoa is headquartered, and Pittsburgh, where the company has its operations center.

Alcoa Corp. will take $2.6 billion of the $5.6 billion in pension and related obligations in the separation. Arconic will hold as much as a 19.9 percent stake in the new Alcoa, while the latter will get a revolving credit facility of as much as $1.5 billion.

Kleinfeld said in September that the largest U.S. aluminum company would split off its smelters, mines and power assets into a stand-alone entity that will keep Alcoa’s name. Alumina Ltd., Alcoa’s joint-venture partner in Australia, took action in U.S. courts to prevent Alcoa from proceeding with the split without Alumina’s consent.

Alcoa invented the aluminum industry over 100 years ago and grew, at its height, to become the world’s biggest producer of the lightweight, rustproof metal. In the past decade, a global glut and protracted downturn in aluminum prices left Alcoa’s smelters struggling to compete as Chinese companies relentlessly boosted output. The price of aluminum has tumbled more than 50 percent from a 2008 peak.

Value-Added Focus

The split marks the culmination of a strategy pursued by Kleinfeld since taking the reins at the company that year. The former Siemens AG CEO has relentlessly emphasized Alcoa’s focus on value-added products while rationalizing the commodity-aluminum business.

The company’s bonds have returned 4 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 2.9 percent in the same period, compared with a 13 percent average increase by miners and a 5.4 percent advance by the S&P 500 Index.

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