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Alcoa Nederland Holding B.V. -- Moody's assigns Ba1 rating to Alcoa Nederland's new senior unsecured notes

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Rating Action: Moody's assigns Ba1 rating to Alcoa Nederland's new senior unsecured notesGlobal Credit Research - 08 Mar 2021New York, March 08, 2021 -- Moody's Investors Service, ("Moody's") assigned a Ba1 rating to Alcoa Nederland Holding B.V.'s (ANHBV) new senior unsecured notes, guaranteed by Alcoa Corporation (Alcoa) and subsidiaries. All other ratings, including the Speculative Grade Liquidity Rating remain unchanged. The proceeds of the notes along with balance sheet cash will be used to repay the outstanding amount of the 6.75% senior unsecured notes due 2024, contribute approximately $500 million to the U.S. defined benefit pension plans and pay the associated fees and expenses.Assignments:..Issuer: Alcoa Nederland Holding B.V.....Senior Unsecured Regular Bond/Debenture,Assigned Ba1 (LGD4)RATINGS RATIONALEMoody's views the repayment of $750 million notes due 2024 and the $500 million prefunding of the U.S. pension plan as credit positive. The transaction will effectively lead to lower Moody's-adjusted leverage, extend the debt maturity profile and reduce exposure to the volatility risk associated with pension obligations, while allowing the company to maintain its excellent liquidity position. Additionally, the pension contribution is expected to eliminate the U.S. pension funding requirement for about 3 years, enhancing the company's financial flexibility.The Ba1 CFR at ANHBV considers its parent's (Alcoa) position as a leading producer of bauxite, alumina and aluminum (including cast products), geographical and aluminum product diversity, and operational quality. Alcoa is well positioned within its products and markets served. Additionally, the company has a good cost production profile, driven by the continued refocusing of its refining and smelting system, reducing operating costs and streamlining the organizational structure, selling non-core assets, curtailing its higher cost facilities or working to reposition them lower on the global cost curve where possible.Although Alcoa has 3rd party sales in both its bauxite and alumina segments, the CFR considers the company's exposure to essentially a single metal commodity -- aluminum - as the demand for bauxite and alumina is directly correlated to the demand for aluminum. Additionally, the alumina and aluminum markets exhibit volatility driven by global growth expectations and industrial production levels. Further considerations include industry overcapacity, particularly given the continued growth in China's smelting capacity, which has further exacerbated the supply/demand imbalance in 2020 leading to the widening of the surplus in the aluminum market.The sharp rebound in Aluminum prices (LME) from the multi-year lows seen in early 2020 to above the pre-pandemic levels, has been driven by improving fundamentals, rebound in automotive production, recovery in China's aluminum demand and output in part due to significant infrastructure and construction stimulus programs, as well as the investment fund positioning. However, Moody's expects that aluminum prices will moderate from currently high levels. Continued aluminum production growth in China in 2021 is expected to partially offset the anticipated increase in global aluminum consumption, leading to a more moderate but still significant market surplus in 2021.Alcoa generated about $1.1 billion in Moody's-adjusted EBITDA in 2020, lower than in the prior 3 years, mainly due to the impact of coronavirus on global economy and aluminum demand, particularly in 1H2020. Weaker earnings combined with higher absolute levels of debt resulted in debt/EBITDA ratio, as adjusted by Moody's, climbing to 3.9x at the year-end from 2.3x in 2019. While the leverage is currently high for the rating, the repayment of 2024 notes and higher projected EBITDA generation in 2021 is expected improve the leverage to the range of 2.0-2.5x by the end of 2021.The stable outlook incorporates Alcoa's excellent liquidity position at December 31, 2020 and anticipates that the company will remain focused on its cash generation and completing its asset portfolio review to improve its financial and operating performance. We expect Alcoa will benefit from increased higher aluminum and alumina prices relative to 2020, cost reduction measures and asset portfolio optimization initiatives. Additionally, relatively low fuel input costs and benefits from depreciated currencies in countries where Alcoa operates will provide some mitigation.The SGL-1 speculative grade liquidity rating acknowledges the company's excellent liquidity as evidenced by its cash position of $1.6 billion at December 31, 2020 and its $1.5 billion secured revolving credit facility (RCF -unrated) at Alcoa Nederland, guaranteed by Alcoa and maturing in November 2023. We expect Alcoa to generate free cash flow in the next 12 months. The revolver had about $1.49 billion availability at December 31, 2020 after the use of $14 million in letters of credit. There are no material maturities until the revolver expires in November 2023.The RCF is secured by substantially all assets. The RCF was amended in April 2020 to provide that for the 4 quarters from April 1, 2020 the consolidated debt/EBITDA covenant shall not exceed 3x during the amendment period and returning to 2.5x thereafter. The Consolidated EBITDA/interest covenant requirement remained at no less than 5x. In June 2020, the RCF was further amended to adjust the calculations for cash interest expense and total indebtedness for the 4 consecutive quarters from June 2020 through June 2021. Concurrently with the transaction, the company entered into another amendment to the RCF to increase the permitted maximum leverage to 2.75x from 2.5x and lower the minimum interest coverage ratio requirement from 5x to 4x, among other changes to provisions that will provide for higher debt capacity. As of December 31, 2020, Alcoa was in compliance with all covenants and we expect the company to remain in compliance in the next 12 to 18 months.The Ba1 senior unsecured debt rating, at the same level as the CFR, reflects the preponderance of unsecured debt in the capital structure, given the level of unsecured notes and unfunded pension obligations relative to the $1.5 billion secured revolving credit facility.As a primary aluminum producer, Alcoa faces numerous environmental risks across the totality of its operations with regulations varying significantly from country to country and region to region.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGGiven the volatility in the commodities in which Alcoa participates and potential for wide swings in performance, further upward rating movement could be limited. However, ratings could be upgraded should Alcoa be able to sustain an EBIT margin of at least 17.5%, EBIT/interest of at least 7x, and debt/EBITDA of no more than 2x. Continued discipline in its capital allocation strategy and financial policy would also be a consideration.The ratings could be downgraded should EBIT/interest be sustained below 4.5x, EBIT margins be less than 8%, leverage exceed and be sustained above 2.75x as the impact of the current difficult economic conditions ease in 2021. Substantial negative free cash flow and liquidity contraction would also be a downgrade consideration.Alcoa Nederland is a wholly owned subsidiary of Alcoa Corporation. Headquartered in Pittsburgh, PA, Alcoa holds the bauxite, alumina, aluminum, cast products and energy business. Alcoa's bauxite and alumina business is conducted through its AWAC joint venture with Alumina Ltd (60% Alcoa/40% Alumina Limited). Revenues for the twelve months ended December 31, 2020 were $9.3 billion.The principal methodology used in this rating was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Botir Sharipov VP-Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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