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.
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.
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.