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When Low Is Low Enough

16 July 2018 by lberuti

The reporting season is only beginning, and this used to be the time of the year when Alcoa was systematically mentioned as it used to be the first corporate to announce its results. Part of the company, which produces and distributes aerospace products, split from Alcoa Corporation, which produces and sells bauxite, alumina and aluminium products, and is now known as ARNC ( Arconic Inc ). It will report in a couple of weeks. Nevertheless, it attracted most of the headlines in the US credit market today. As of Friday, its stock was down 44% from the high it reached mid-January. It had suffered from tensions concerning the US aluminium and steel tariffs that have roiled metal producers. It is in this context that the Wall Street Journal reported late on Friday that private equity firms would be circling the company. Even though it is facing operational challenges, its weak cash generation and attractive valuation offer potential buyers a favourable entry point according to analysts. LBOs are synonymous of increased leverage, and while they sent ARNC’s stock 10% higher, investors pushed the company’s 5-year risk premium 85bps wider at 283bps.