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Everybody To The Right… Everybody To The Left

30 September 2015 by lberuti

Like every other quarter, AA ( Alcoa Inc ) will be among the first to report at the very beginning of the second week of October. But while the results might get any scrutiny and generate some volatility as commodity related names have been under the spotlight recently, AA already proved over the last few days that it is not a credit for the faint hearted. On Monday, the company announced its plan to break itself in two by separating its manufacturing operations (the “Value-Add” business still to be named) from the legacy smelting and refining business (which will retain the Alcoa name) that is struggling to overcome booming production from China. Investors were unsure where the debt might end up, and they feared that the bonds might go to the less attractive part of the business, i.e. Alcoa. Accordingly, they sent AA’s 5 year risk premium 140bps wider at 457bps, meaning that a 5 year bond lost roughly 7cts on the dollar on that day. The company management issued a statement late yesterday saying that “Alcoa’s current intent is that the debt of Alcoa would be retained by the Value-Add company for which Alcoa is targeting an investment grade rating”. Guess what? AA’s 5 year risk premium closed at 335bps tonight.