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ArcelorMittal Cut to Junk by Moody’s on Debt Plan Concerns

November 06, 2012

ArcelorMittal Cut to Junk by Moody’s as Debt Plan ‘Unachievable’

Liquid steel is poured into containers on the back of a rail car at the ArcelorMittal steel-making factory in Kryvyi Rih, Ukraine. Photographer: Vincent Mundy/Bloomberg

ArcelorMittal had its credit rating cut to junk by Moody’s Investors Service as the world’s largest steelmaker seeks to reduce its $23.2 billion in net debt.

ArcelorMittal’s senior unsecured note rating was lowered to Ba1 from Baa3. “We see challenging conditions continuing for ArcelorMittal over several quarters with its operating environment more likely to get worse before it gets better,” Moody’s said in a statement today.

Standard & Poor’s cut its rating on Luxembourg-based ArcelorMittal’s debt to junk on Aug. 2, citing a weakening industry and lack of clarity over the company’s plans to curb borrowings. Moody’s said at the time it would follow suit unless ArcelorMittal reduced debt by about $5 billion before the end of the year.

ArcelorMittal reported the lowest quarterly profit in almost three years on Oct. 31 and cut its 2013 dividend by 73 percent to save about $1 billion. Chief Executive Officer Lakshmi Mittal is selling assets and moving output to cheaper sites and idling plants.

The debt reduction required to maintain investment grade “is so large as to be unachievable or, if attempted through asset disposals, will materially impact the core operations and earnings of the company,” Moody’s said.

Excluding proceeds from any further asset sales, net debt will be about $22 billion at the year-end, ArcelorMittal said last week.

Robust Financials

“We note the statement by Moody’s today which reflects their view of a deteriorating macroeconomic outlook,” the company said in a statement. “ArcelorMittal’s financial position remains robust; the programs we have in place to improve our credit metrics remain on track and we expect to see further progress in the coming months.”

ArcelorMittal advanced in Amsterdam trading as investors took the view that the downgrade removed the likelihood of the the steelmaker selling shares to cut debt and retain its investment grade rating. The stock climbed 3.2 percent to 12.24 euros, the highest close in more than two weeks.

An investment grade rating was a “want,” not a need for ArcelorMittal, Credit Suisse Group AG analysts wrote in a note to clients today.

“This is the catalyst the market has been waiting for and we believe will continue to provide relief for the shares,” the analysts said. “A risk of a rights issue to meet Mittal’s ‘want’ was a risk which we now see put to bed.”

Default Swaps

ArcelorMittal (MT)’s $1.4 billion of 4.5 percent notes due 2017 dropped 2.78 cents to 96.21 cents on the dollar, the lowest since Aug. 10, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The cost of insuring ArcelorMittal debt increased 3.5 basis points to 557 basis points, the highest since Oct. 11, according to Bloomberg prices for credit-default swaps.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The company said in July it was selling 48 percent of engineering company Paul Wurth Group to SMS GmbH for 300 million euros ($389 million) and in May agreed to sell Skyline Steel LLC to Nucor Corp. (NUE:US) for about $605 million. It’s also considering divesting a stake of about 30 percent in its Canadian iron-ore unit, according to a person with knowledge of the matter.

To contact the reporter on this story: Thomas Biesheuvel in London at

To contact the editor responsible for this story: John Viljoen at

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