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Fitch bumps Alcoa outlook up to stable, drops BB+ rating from evolving watch

Fitch Ratings has upgraded to Stable Outlook andremoved its BB+ credit rating from Rating Watch Evolving on expectations that theNew York-based aluminum heavyweight will have the same instrument ratings whetherit goes ahead with its plannedsplit into two companies or not.

The rating agency said July 7 that the proposed spinoffcompany, Arconic Inc., is expected to have funds from operations adjustedleverage trending below 3.3x and above 2.8x over the rating horizon.

"The removal from the Rating Watch and the StableOutlook reflect Fitch's view that whether the separation occurs as currentlyplanned or the company remains as is, the instrument ratings would be thesame," the agency said.

Fitch believes Arconic, which will take on the global rolledproducts, engineered products and solutions, and transportation andconstruction solutions, has more consistent margins and lower commodity pricerisk than Alcoa.

Arconic's operating EBITDA for the year to March 31 isestimated to be US$1.5 billion, while 2017 operating EBITDA is forecast toimprove to US$1.8 billion on a full-year contribution from RTI InternationalMetals Inc. and TITAL, both acquired in 2015, and the resolution of problemswith Firth Rixon's isothermal forge.

Fitch calculates Arconic's total debt will be about US$8.2billion and adjusted debt will be US$9.1 billion, including 8x operating leaserent of US$112 million.

Arconic plans to dispose of the Alcoa shares that it retainsas part of the separation within 18 months and no later than five years afterthe spinoff.

Fitch estimates a 19.9% stake could fetch between US$836million and US$1 billion.

Meanwhile, Alcoa could achieve funds from operations grossleverage of 3x or less under the proposed capitalization, according to therating agency.

The company, which will continue to house the bauxite,alumina, aluminum, casting and energy business units, is estimated to havegenerated operating EBITDA of US$1.2 billion in the year to March 31.

There is some uncertainty as to whether Alcoa will be ableto go ahead with the business separation, with the company's 40% partner in theAlcoa World Alumina and Chemicals, Alumina Ltd., taking legal action to block the move.Alcoa conceded in late June that it may not get the split over the line if a Delaware courtrules in favor of Alumina.