Alcoa’s Leverage Metrics Look Comfortable after the Split



Leverage metrics

One of the biggest investor concerns about Alcoa’s (AA) split related to the splitting of liabilities—namely, debt and pension liabilities. Alcoa addressed this issue by retaining its entire debt with Arconic. Alcoa has a debt liability of $1.5 billion, which would be comprised mainly of notes that were issued in September.

According to Alcoa, the company had a cash balance in excess of $600 million on November 1, 2016. It would leave it with a net debt of $831 million. Based on Alcoa’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’s leverage ratios would be lower than some of the other companies in this space (CENX) (NHYDY) (XME).

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Split structure

However, this doesn’t mean that Arconic (ARNC) investors got a raw deal in the split. After the split, Arconic still holds an ~20% stake in Alcoa. Arconic plans to monetize this stake in 18 months. However, the company retained the option to hold Alcoa’s stake for up to five years. During the company’s investor event held last month, Ken Giacobbe, Arconic’s chief financial officer, said that the company had “voluntarily agreed to a 60-day lock-up period post separation.”

Deleveraging opportunity

Currently, Arconic’s stake in Alcoa is valued in excess of $1 billion. The value could change depending on the day-to-day movements in Alcoa’s stock price. The arrangement would help Alcoa reduce its debt level. It would offer future deleveraging opportunities for Arconic. However, issuing new shares expanded Alcoa’s equity base and led to equity dilution.

Meanwhile, Alcoa expects bauxite to be one of its growth drivers. We’ll explore this in detail in the next part.


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