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| Bill Plummer |
Alcoa has cinched a $1 billion, five-year revolver with JPMorgan that provides the cheapest pricing on five-year bank debt the aluminum producer has ever had. A desire by banks to cement relationships with corporates and overall economic performance is leading to a bonanza for borrowers. "The whole investment-grade market is very strong today. Banks are very liquid," noted, Bill Plummer v.p. and treasurer of Alcoa. He explained that central banks pumping liquidity into the market on a global scale is also a major driving force. "We improved the undrawn cost, we improved the drawn cost at lower ratings and we improved the upfront fee that we paid to get the facility in place," he said. The undrawn facility fee is just 6 1/2 basis points. If the company uses the revolver there is a ratings grid on the drawn spread that is currently LIBOR plus 27 bps.
Alcoa's 364-year revolver was expiring and it realized that under the current market conditions obtaining a longer-term credit would be more favorable in terms of pricing than a 364-day revolver, Plummer noted. The expiring revolver was less costly than the new five-year facility, but in terms of historical prices for other five-year Alcoa credits, pricing improved, he clarified.
The company has $2 billion in different revolvers that will mature in 2008 and 2009. Therefore, "another consideration for Alcoa was how this third tranche would fit in with the other maturities," said Plummer. As the other facilities expire, the new revolver will leave $1 billion available each year. Alcoa also has long-term fixed public debt in the marketplace with maturities that go from 2007 to 2008. The last time Alcoa went to the fixed income market was in the summer of 2002 with $800 million of five-year notes and then $600 million of 10-year notes priced at 5 3/8%.
Plummer said the company has been improving both the balance sheet and the ability to generate cash flow to support debt financings. In the past three years Alcoa has reduced its debtto-capital ratio from 43% to 30%. "From a credit perspective Alcoa has become a stronger credit and that has helped the banks get even more comfortable," he suggested. A very strong environment for metal prices during 2004 has provided a major boost to cash flow.
Alcoa does not do business exclusively with the banks that provide the company's liquidity. "We look to the core relationship first, but that doesn't mean they automatically get all of our business just because they are providing the revolvers for us," Plummer explained. "We try to put our investment bank advisors on equal footing with other commercial banks that we think can compete in terms of the services they offer. In order to do that, we don't feel that it is fair to ask a commercial bank to participate without asking the investment bank relationships that we have to participate as well."
The company does not have a formal bidding process for a lead lender. Instead, it relies on informal discussions that stem from ongoing relationships. "Most of the previous years we've decided that JPMorgan was the best lead arranger for our facilities," said Plummer.
The key person at JPMorgan was Jim Ramage, he noted. National Bank of Australia and HSBC were added to the syndicate. NAB was a participant in other five-year credit facilities and there were no drop-outs.
