(The following statement was released by the rating agency)
Jan 10 - Fitch Ratings has assigned Luxembourg-based ArcelorMittal S.A’s (AM) planned USD2.25bn mandatorily convertible subordinated notes (MCN) a ‘BB-(EXP)’ expected rating. At the same time the agency has affirmed AM’s Long-term Issuer Default Rating (IDR) and senior unsecured ratings at ‘BB+'. The Short-term IDR was affirmed at ‘B’, while the existing USD650m subordinated perpetual capital securities have been affirmed at ‘BB-'. The Outlook on the Long-term IDR is Stable. The mandatory convertible notes will be unsecured and deeply subordinated, leading to the two-notch differential to the Long-term IDR.
AM announced on 9 January 2013 a USD4.0bn (before deduction of commissions) combined common equity and MCN offering. The equity offering totals USD1.75bn whilst the MCNs, due in 2016, will total USD2.25bn. Fitch notes that the proceeds from the transaction will be used to refinance existing debt, lengthen the group’s debt maturity profile and moderately improve its liquidity position.
Under Fitch’s hybrid criteria the notes have been assigned 100% debt treatment. This treatment reflects the presence of dividend pusher clause within the draft documentation. Under the agency’s criteria this clause represents a constraint upon the ability of the instrument/issuer to defer interest coupon payments leading to debt treatment.
The final issue rating will be assigned once Fitch receives final documentation that conforms to information already reviewed by the agency.
AM has set a target of achieving net debt of USD17bn by June 2013. This is expected to come from a variety of non-operational means including the planned equity/MCN issue, the announced USD1.1bn sale of a 15% stake in ArcelorMittal Mines Canada, and the agreed sale of a 50% stake in Kalagadi manganese for approximately USD450m. A further net debt reduction target of USD15bn in the medium term will come from operating cash flows. For 2013, Fitch now expects an EBIT margin of around 2.5% with funds from operations (FFO) gross leverage of between 3.5x-4.0x.
-Western European Steel Market
Fitch expects market conditions to remain challenging for western European steel producers in 2013. From a demand perspective, construction is expected to be weakest with a 5%-10% volume fall whilst no improvement in automotive markets is expected until late 2013. Steel prices are unlikely to increase materially in the coming 12 months, translating into ongoing weak profitability and free cash flow generation for producers.
-Significant Scale and Diversification
The ratings reflect AM’s position as the world’s largest steel producer. AM is also the world’s most diversified steel producer in terms of product mix and geography, and it benefits from a solid level of vertical integration into iron ore.
-Mid-Point Cost Position
AM has an average cost position (higher second quartile) overall, varying across the key regions in which it operates. The cost positions of individual plants vary significantly, with those in Europe generally operating at higher costs, while those in the Americas, Asia and the Commonwealth of Independent States have the lowest costs. The company has embarked on a cost-saving initiative that will see utilisation rates increased at the lower-cost plants, supporting an improvement in longer-term profitability.
-Increasing Mining Output
AM is expected to continue to expand its mining operations, notably through investments in iron ore in Liberia, Canada and Brazil. Fitch expects the mining division to become a larger contributor to group EBITDA, contributing over 35% by 2014. Higher mining margins compared to those generated by the steel operations will have a positive effect on group profitability.
Positive: Future developments that could lead to positive rating actions include:
-FFO gross leverage below 2.25x
-Recovery in EBIT margins to above 6%
Negative: Future developments that could lead to negative rating action include:
-FFO gross leverage sustained above 3.0x
-Persistently negative free cash flow