Here’s How Alcoa Plans To Apportion Its Debt Among Its Successor Companies Post The Upcoming Split
Alcoa has made a Form 10 filing with the SEC, which is a precursor to the planned split of the company’s upstream and value-added businesses into two publicly traded companies in the second half of the year. One of the resulting companies will comprise Alcoa’s upstream businesses, which include: the Primary Aluminum and Alumina business segments, as well as the North American Can Sheet business. It will be named Alcoa Corp. The other resulting business, to be named ‘Arconic Inc., will comprise the downstream business, which include: the parent company’s Engineered Products & Solutions, the Global Rolled Products (excluding the North American can sheet business), and the Transportation & Construction Solution business segments. All of Acronic’s businesses produce multi-material value-added products which cater to a wide variety of end markets, with aerospace and automotive the two most prominent among them. Arconic Inc. will retain a 19.9% equity interest in Alcoa Corp. [1]
Following the split, the parent company’s debt will remain with Arconic Inc. Alcoa Corp., the upstream successor will raise $1 billion in debt and pass on the proceeds to Arconic, which Arconic may use for debt reduction. The upstream company will also obtain a $1.5 billion revolving credit facility. If we assume that Alcoa Corp raises $1 billion in debt and Arconic uses the proceeds to lower its debt by $1 billion, we arrive at the estimates in the table below of indebtedness for the two companies.
Note: A portion of the Global Rolled Products (GRP) segment will be retained by Arconic, whereas the North American can sheet business will be a part of Alcoa Corp. In order to arrive at EBITDA estimates for the two successor companies, we have divided the 2016 estimated EBITDA for the undivided GRP segment among the two successor companies as per the estimated revenues of the respective portions of the GRP segments in the two successors, estimated on the basis of pro forma 2015 financial statements given in the form 10 filing.
The company management expects Arconic to retain the company’s current credit rating, given the prevailing robust demand conditions in the aerospace and automotive end markets, (Ba1 by Moody’s, the best non-investment grade rating, Moody’s Investor Services) and for Alcoa Corp. to attain a high non-investment grade rating as well. [2] The upstream business’ prospects look bleak in the short term (in the prevailing environment of subdued aluminum and alumina prices) and a low debt burden may result in a high non-investment grade rating for Alcoa Corp. However, it remains to be seen whether Arconic, with a considerably higher debt burden as a percentage of EBITDA, can retain the existing company’s credit rating.
Have more questions about Alcoa? See the links below.
- What Is Alcoa’s Revenue & EBITDA Breakdown?
- What Is Alcoa’s Fundamental Value Based On Expected 2015 Results?
- By What Percentage Did Alcoa’s Revenue & EBITDA Increase In The Last 5 Years?
- How Has Alcoa’s Revenue Composition Changed Over The Last 5 Years?
- By What Percentage Can Alcoa’s Revenue & EBITDA Grow In The Next 3 Years?
- What Is The Impact Of Alcoa’s Enhanced Aerospace Focus On Revenue Growth From Aerospace End Markets?
- With Alcoa Heading For A Split In 2016, What Will The Two Companies Look Like?
- Which Are The Major Growth Areas For Alcoa Over The Next Three Years?
- Alcoa’s Q1 2016 Earnings Preview: Weakness In Aluminum Prices To Negatively Impact Revenue & Earnings
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Notes:- Alcoa Form 10 Filing, Alcoa Website [↩]
- Alcoa Conference Call Transcript, Seeking Alpha [↩]