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Investor Alert: Is Alcoa Due for a Credit Rating Upgrade?

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Feb. 9 2017, Updated 9:05 a.m. ET

Credit rating

A credit rating is a key metric for investors in capital-intensive industries. To meet recurring capital expansion plans and working capital needs, aluminum companies need a lot of capital, including debt. As a result, a company’s credit profile becomes a key metric. Low ratings hurt a company’s ability to raise funds, which increases the company’s cost of borrowing.

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Pre-split credit rating

Prior to the split, Alcoa had a split credit rating from rating agencies. Alcoa had a Ba1 CFR (corporate family rating) from Moody’s with a negative outlook. This is the highest speculative grade credit rating (HYS). However, Standard & Poor’s gave the company a BBB- rating, which is the lowest investment-grade rating.

Alcoa was aiming for an investment-grade credit rating for its value-add company (ARNC) while maintaining a strong noninvestment-grade rating for the upstream company (AA). A noninvestment-grade credit rating shouldn’t come as a surprise to investors since several leading companies in the pure-play commodity space have noninvestment-grade ratings.

Rating agencies have noted a prolonged slowdown in the commodities space (CENX) (RIO). They either downgraded mining companies or put them on a watch for a possible downgrade. We saw several credit rating downgrades in the mining space over the last couple of years.

Post-split credit rating

Currently, Alcoa (AA) has a BB- credit rating from Standard & Poor’s with a stable outlook. During the company’s 4Q16 earnings call, William Oplinger, Alcoa’s CFO, pointed out that the credit rating could be low when considering Alcoa’s financials.

In the next article, we’ll discuss the factors that could impact Alcoa’s credit rating in 2017.

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