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Why Alcoa Might Be Able to Get the Desired Credit Rating

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Credit rating

A credit rating is a key metric for investors in capital-intensive industries. To meet the recurring capital expansions and working capital needs, aluminum companies need a lot of capital. Debt is part of that capital. So, the credit profile becomes a key metric. Low ratings hurt a company’s ability to raise funds. Low ratings also increase borrowing costs.

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Desired credit rating

Alcoa (AA) was initially aiming for an investment grade credit rating for its value-add company while maintaining a strong non-investment grade rating for the upstream company. A non-investment grade credit rating shouldn’t come as a surprise to investors since several leading companies in the pure-play commodity space have non-investment grade ratings. Also, rating agencies noted a prolonged slowdown in the commodities space. They either downgraded mining companies or put them on watch for a possible downgrade.

Other miners

Diversified miners like Rio Tinto (RIO) and BHP Billiton (BHP) have also been downgraded by rating agencies. However, both companies still enjoy investment grade credit ratings (BND) (LQD).

After the split, Alcoa would only have the newly raised $1 billion debt on its balance sheet. However, it would still have a hefty pension liability to cope with. China’s slowdown would continue to put pressure on commodity prices.

Even with these headwinds, Alcoa might get a strong non-investment grade credit rating after the split. However, Arconic might face difficulty in getting an investment grade credit rating. We’ll discuss this more in the next part of the series.

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