How Alcoa Plans to Divide Its Liabilities after the Split




Previously, we saw how Alcoa would be dividing its assets after the split. In this part of the series, we’ll see how the company plans to divide liabilities between the two companies. It’s important to note that Alcoa (AA) has a total outstanding debt of ~$9 billion as of March 31, 2016. The consolidated pension and OPEB (other post-employment benefits) liabilities stand at $5.6 billion.

After the split, Alcoa would have ~$2.6 billion in pension liabilities, while Arconic would take the remaining $3 billion in liabilities.

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Debt allocation

Alcoa’s current outstanding debt liabilities would be on Arconic’s balance sheet. After the split, Alcoa would raise $1 billion. It would be paid to Arconic. Arconic plans to use the funds to repay some of the debt that it would assume after the split.

After the split, Arconic would continue to have an ~20% stake in Alcoa. Arconic plans to monetize Alcoa’s stake in 18 months. However, the company retained the option of holding Alcoa’s stake up to five years.

Would it help?

This might sound counterintuitive because the premise of the split was to separate the two companies. So, why is Arconic planning to retain Alcoa’s stake even after the split? According to Alcoa, retaining Alcoa’s stake would provide it with a liquid security. Also, it would help Alcoa separate with lower leverage ratios.

Alcoa might have to raise more than $1 billion to pay Arconic for the debt burden Arconic is assuming. However, looking at the current depressed aluminum prices (DBB), raising more than $1 billion might not be feasible for Alcoa. Once market conditions improve, Arconic can sell Alcoa’s stake and use the funds to repay some of its debt.

However, aluminum market conditions might continue to be depressed for some time. Higher Chinese aluminum exports are putting pressure on aluminum prices. This is having a negative impact on primary producers like Century Aluminum (CENX), Rio Tinto (RIO), and Norsk Hydro (NHYDY).

In the next part of the series, we’ll explore if Alcoa can manage to get the desired credit ratings for the two entities after the split.


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