Fitch Affirms Alcoa's IDR at 'BBB-'; Outlook Negative Ratings Endorsement Policy

11 Apr 2013 4:58 PM (EDT)

Fitch Ratings-New York-11 April 2013: Fitch Ratings has affirmed the ratings for Alcoa Inc. (NYSE: AA, Alcoa) 

including its Issuer Default Rating and senior unsecured debt at 'BBB-'. A full list of rating actions follows at the end of 

this release.

The Rating Outlook is revised to Negative from Stable.

RATING DRIVERS:

The ratings reflect Alcoa's leading position in the industry, its strength in low-cost alumina production, and the 

operating flexibility afforded by the scope of its operations. Alcoa ranked as the third largest primary aluminum 

producer in 2012. Its aluminum production is about average cost and its alumina production is in the low second 

quartile. Engineered Products and Solutions (EPS) and Global Rolled Products (GRP) benefit from the scale of 

research and development, past restructuring efforts and growing end-market demand. Alcoa benefits from being 

vertically integrated and geographically diversified.

Alcoa's operating flexibility coupled with strong liquidity should offset the possibility of near-term weakness in the 

aluminum market as new low cost capacity is added and high cost capacity is slowly curtailed. Fitch believes 

production surpluses will shrink but persist through 2014 and that prices should improve from current lows.

Fitch notes that for the latest 12 months ended (LTM) March 31, 2013, EPS accounted for over half of EBITDA and 

EPS taken with GRP accounted for 71% of 2012 segment after-tax operating income. On the margin and all else 

equal, Alcoa reports that a $100/tonne increase or decrease in the price of primary aluminum as reported on the 

London Metal Exchange would increase or decrease annual net income by $240 million.

Fitch believes that earnings and cash flow generation should continue to improve with economic recovery but will be 

constrained in 2013 by low metals prices and weakness in Europe. Fitch expects 2013 EBITDA to be at least $2.7 

billion, which would result in financial leverage remaining slightly above 3 times (x) in 2013. Results in 2013 should be 

enhanced by improvements and curtailments undertaken in 2012 as well as strength in businesses related to 

aerospace and automotives.

Fitch expects Alcoa to generate cash flow in 2013 after capital expenditures of $1.6 billion but before dividends and 

the $350 investment in the Ma'aden joint venture. Fitch expects free cash generation to be challenged in 2013 given 

low aluminum prices related to persistent oversupply in the market. Should demand weaken and realized prices fall 

thereby pressuring earnings and cash flow, Fitch expects Alcoa to curtail high cost production further, cut capital 

spending and/or sell assets.

Alcoa generated operating EBITDA of $2 billion in 2012 and free cash flow of $103 million after capital expenditures 

of $1.3 billion, $561 million of cash contributions to pension funds and shareholder dividends of $131 million before 

the Ma'aden investments of $251 million. Net Debt declined $469 million following the repayment of $322 million in 

notes maturing during the year, and pre-tax proceeds from the sale of Tapoco power asset of $597 million.

At March 31, 2013, the $3.75 billion revolver maturing July 25, 2016 was fully available (commercial paper 

outstanding was $104 million) and cash on hand was $1.6 billion. The revolver has a covenant that limits 

Consolidated Indebtedness to 150% of Consolidated Net Worth. Fitch notes that the first quarter generally shows 

high seasonal working capital; a key focus is working capital management and turns have reduced year-over-year for 

the period under review. Fitch expects debt to be reduced in 2013 by seasonal working capital borrowings as well as 

the $422 million notes due in July.

As of March 31, 2013, near-term scheduled debt maturities are estimated to be: $614 million in 2013, $661 million in 

2014, $34 million in 2015, $33 million in 2016 and $780 million in 2017. Of the aggregate maturity in 2014, $575 

million represents the convertible notes due March 15, 2014; the initial conversion rate was equivalent to a 

conversion price of approximately $6.43/share which compares with the share price at April 8, 2013 of $8.39.

Alcoa contributed $83 million to its pension plans in the first quarter of 2013 in consideration of the estimated 

minimum required contributions to pension plans in 2013 of $460 million. At Dec. 31, 2012, aggregate pension plans 
were underfunded by $3.7 billion, of which the U.S. pension plans were underfunded by $3 billion on a U.S. GAAP 

basis.

The Negative Outlook reflects the possibility that, given weakness in the aluminum market, EBITDA will fall short of 

expectations and high financial leverage will persist.

RATING SENSITIVITIES:

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Operating EBITDA below $2.7 billion in 2013;

--Constrained liquidity;

--Absence of debt repayment including short-term debt and maturities for 2013 and 2014;

--Total Debt/Operating EBITDA above 2.5x by the end of 2014.

Positive: Not anticipated over the next 12 months given over supply in the aluminum market, but future developments 

that may lead to a positive rating action include:

--EBITDA anticipated to be sustainably over $4 billion, total debt below $8 billion, and free cash flow positive on 

average.

Fitch has affirmed the following ratings:

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-';

--$3.25 billion revolving credit facility at 'BBB-';

--Preferred stock at 'BB'.

--Short-term IDR at 'F3';

--Commercial paper at 'F3'.

The Rating Outlook is revised to Negative from Stable.

Contact:

Primary Analyst

Monica M. Bonar

Senior Director

+1-212-908-0579

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

Secondary Analyst

Christopher M. Collins, CFA

Director

+1-312-368-3196

Committee Chairperson

Sean T. Sexton, CFA

Managing Director

+1-312-368-3130

Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the 
issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', dated Aug. 8, 2012.

Applicable Criteria and Related Research

Corporate Rating Methodology

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