LONDON (Reuters Breakingviews) - ArcelorMittal ISPA.AS, the world's biggest steelmaker, is tackling debts by selling $3.5 billion of new shares and convertible bonds. This is easier than a rights issue and the company sensibly waited for warmer market sentiment before jumping in. But the latest capital call will once again eat into the stake of the controlling Mittal family.
At first, and somewhat paradoxically, a fall to "junk" status last year seemed to remove the need for a capital-raising at the indebted metals giant. With no investment-grade rating to defend, the logic went, the pressure to shore up the balance sheet lessened. In reality, it seems Chairman and Chief Executive Lakshmi Mittal, and son Aditya Mittal, the chief financial officer, were merely wearing their best poker faces.
That bought them time to wait for better conditions. And the markets smiled on them. From November 5, the day before a crucial Moody's downgrade, to January 8, ArcelorMittal's Dutch-listed shares rose 13 percent. The general appetite for risk has grown too: spreads on the iTraxx Crossover CDS index, for example, narrowed 18 percent. That is very helpful if you are selling instruments that blend a 6-percent-odd yield and equity upside, as the three-year mandatory convertibles being sold here do.
The deal reprises a 2009 capital-raising, which also used convertibles to avoid the prolonged headache of holding a rights issue. But this again tests the deepness of the Mittals' pockets. They will contribute $600 million - or 17 percent of the total new capital. That is way short of their existing stake of 41 percent. The ultimate result depends on the final combination of capital raised, and how the Mittals' contribution is spent. But their holding might drop to about 38 percent.
Still, the capital call makes sense. Along with asset sales, it will help cut net debt to $17 billion by mid-2013, a $5 billion reduction in six months. That burden now looks more manageable when set against EBITDA of $7 billion. Agencies are unlikely to grant ArcelorMittal a quick return from "junk". Betting on a steel-market recovery won't be for all investors. But with the strength now added to the balance sheet, some who have shunned the stock might now steel themselves to take a fresh look.
- On January 9 ArcelorMittal said it would issue $3.5 billion of shares and mandatorily convertible notes to help reduce debt. The world's biggest steelmaker said it expects net debt to hit $17 billion by June 30, down from about $22 billion at the end of 2012. The Mittal family will contribute $600 million. They own about 41 percent of the company, according to the 2011 annual report.
- Moody's, which two months earlier cut ArcelorMittal's credit rating to Ba1, its highest "junk" rating, said the move was "credit positive". But Moody's will keep a "negative outlook" until ArcelorMittal de-gears further and both the global economy and steel markets improve.
- Market demand will help determine the final breakdown between shares and convertible bonds. Arcelor expects to price the three-year convertibles with a coupon between 5.875 percent and 6.375 percent. If ArcelorMittal's stock rises, the conversion price for the convertibles also rises, to a maximum 125 percent of the original share placement price. The measure is meant to reduce shareholder dilution.
- Amsterdam-listed shares in ArcelorMittal stood 3.3 percent lower by 1600 GMT, at 12.975 euros a share.
(Editing by Robert Cole and Sarah Bailey)
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)