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Aluminum producer Alcoa spinoff to shed $9 billion in debt

| Wednesday, June 29, 2016, 11:00 p.m.

Alcoa Inc. will give its struggling aluminum production business a solid financial start to life as an independent company when it spins off those mining, refining and smelting units from its more profitable parts-manufacturing divisions later this year.

The commodity business, which has been hammered by low aluminum prices, will leave behind $9 billion in debt, get access to a $1.5 billion revolving credit line and cut its pension and other retiree benefit obligations by more than half, CEO Klaus Kleinfeld told analysts Wednesday as the company detailed plans to split the company in two.

“We really were looking for creating the strongest possible balance sheet for both companies to optimize financing,” Kleinfeld said.

In exchange for cutting its liabilities, the spinoff company, which will be called Alcoa Corp., will borrow $1 billion from bond investors. Alcoa Corp. will transfer the proceeds of the bond sale to the manufacturing business, which will be called Arconic, to pay down debt it retained from the combined company.

With low metal prices causing financial losses in Alcoa's commodity aluminum business, it's important that the spin-off company starts out with low debt levels, said John Tumazos, an analyst and owner of Tumazos Very Independent Research in Holmdel, N.J.

Alcoa Corp. is going to have difficultly turning a profit following the separation given the global overcapacity in the aluminum market, Tumazos said.

“The aluminum business is difficult,” he said. “That's why all the debt went to the other company.”

Arconic will take additional steps beyond the debt obligations to reduce the pressure on the spinoff company. Alcoa Corp. will take $2.6 billion of the combined company's $5.6 billion in pension and other retiree liabilities with Arconic retaining $3 billion of those obligations. Arconic will retain a stake of up to 19.9 percent in the spinoff company, which Kleinfeld expects Arconic to sell off and pay down some of its debt.

Using the proceeds of the stock sale to pay that debt will prevent Arconic from leaning on Alcoa to pay a greater share than the $1 billion it plans to borrow in debt markets. Kleinfeld said low aluminum prices and volatility in the high-yield bond market make it risky for Alcoa Corp. to raise larger amounts of debt following the split. Arconic can sell off the shares when conditions improve, said Kleinfeld, who is slated to become CEO of Arconic and chairman of Alcoa Corp. following the split. The company would aim to sell the shares within 18 months after the separation but could hold them for up to five years.

Andrew Lane, an analyst with Morningstar Inc. in Chicago, said Arconic's stake in Alcoa Corp. “makes sense in that it's a conservative approach” that “reduces Alcoa's dependence on the credit markets and allows for lower (debt) leverage.”

Alcoa announced the plan to split in September as Kleinfeld tries to raise the value of the parts-manufacturing business, which produces profitable components for the aerospace and automotive industries. The commodity aluminum business has been hampered by global production overcapacity, which has pressured prices and caused financial losses.

On Wednesday, the company filed details of the separation with the Securities and Exchange Commission which show that Alcoa Corp.'s financial footing has grown unsteady in recent years.

The units of the business that will become Alcoa Corp. lost $863 million last year, more than triple the loss of $256 million in 2014, the filing showed. Over the same period, sales declined 15 percent to $11.2 billion.

Alcoa Inc.'s stock price fell 23 cents a share Wednesday, or 2.5 percent, to $9.10.

The filing didn't provide a date for the spin-off. Alcoa Inc. stockholders will retain their shares in Arconic and receive shares of Alcoa Corp., but the filing didn't disclose the exact amount they will receive. The company plans to update the filing later this year.

Alcoa Inc. is based in New York but has significant operations and employees in Pittsburgh, where the company was founded more than 120 years ago. Arconic and Alcoa Corp. plan to share a corporate operations center on the North Shore and research center in Upper Burrell, spokeswoman Tracie Gliozzi said. Both companies will be headquartered in New York, she said.

Kleinfeld also said he is confident that a lawsuit attempting to block to split will be resolved quickly without affecting the spin-off. Alumina Ltd., which is a joint venture partner with Alcoa on bauxite mines in Australia, filed a lawsuit in state court in Delaware to prevent Alcoa from proceeding with the split without Alumina's consent.

“We are confident that the separation does not require Alumina consent,” Kleinfeld said. “We really look forward to putting this matter behind us as soon as possible.”

Alex Nixon is a Tribune-Review staff writer. Reach him at 412-320-7928 or anixon@tribweb.com.

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