Alcoa’s balance sheet
One of the biggest investor concerns about Alcoa’s (AA) split is related to the splitting of liabilities; namely, debt and pension liabilities. Alcoa has addressed this issue by retaining its entire debt with the future Arconic. Alcoa Corporation would have a debt liability of $1.5 billion, which would be comprised mainly of notes that were issued last month. Alcoa Corporation would have ~$2.6 billion in pension liabilities, while Arconic would take the remaining $3.0 billion in liabilities.
Comfortable leverage ratio
Alcoa Corporation is expected to have a cash balance in excess of $600.0 million on November 1, 2016, when it’s listed as a separate company. This would leave it with a net debt of $831.0 million.
Based on Alcoa Corporation’s trailing 12-month EBITDA (earnings before interest, tax, depreciation, and amortization), the company would have a net-debt-to-EBITDA multiple of 0.8 and a debt-to-equity ratio of 20.0%. Alcoa Corporation’s leverage ratios would be lower than some of the other companies in this space.
After the split, Arconic would continue to have a ~20.0% stake in Alcoa Corporation, which would issue fresh shares to Arconic. Arconic plans to monetize Alcoa’s stake in 18 months. This arrangement would help Alcoa Corporation reduce its debt level and also offer future deleveraging opportunities for Arconic. However, issuing new shares would expand Alcoa Corporation’s equity base and lead to equity dilution.
Alcoa Corporation would have a noninvestment-grade credit rating of Ba3 and BB- from Moody’s and Standard & Poors, respectively. Among other aluminum producers, Rio Tinto (RIO) and Norsk Hydro (NHYDY) have investment-grade credit ratings (LQD), while Century Aluminum (CENX) has a noninvestment-grade credit rating.
In the next part, we’ll look at Alcoa Corporation’s growth drivers.