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Announcement:

Moody's changes ArcelorMittal's rating outlook to negative from stable (Baa3 senior unsecured)

Global Credit Research - 02 Aug 2012

London, 02 August 2012 -- Moody's Investors Service today changed its rating outlook for ArcelorMittal to negative from stable. Moody's affirmed ArcelorMittal's Baa3 senior unsecured rating, its P-3 Commercial Paper rating, and the Baa3 rating for debt issued by ArcelorMittal, ArcelorMittal Finance and ArcelorMittal USA. The change in outlook reflects Moody's more negative appraisal of worldwide steel market conditions over the next six months, in combination with ArcelorMittal's relatively weak credit metrics.

"With the company's near-term operating performance more likely to decline than improve, progress toward strengthening leverage and cash flow ratios depends on debt reduction, which relies on asset sales or credit-protection measures. The company is taking steps to reduce debt and improve operating performance, however, the challenging economic and steel industry environment may undermine the full force of these credit-reinforcing actions," says Steve Oman, Senior VP-lead analyst for the steel industry in EMEA at Moody's.

Stabilizing the outlook will require both a sizable reduction of debt and an improvement in operating performance. If steel market conditions continue to be similar to or, as we expect, slightly worse than the first half of 2012, we will maintain a negative outlook -- as opposed to lowering the company's ratings -- as long as the company is on track to reduce gross debt by a significant amount, of the magnitude of $5 billion, over the next six months. In the event the company's operating performance appears to be moving materially below recent levels (for example, less than $7.5 billion of adjusted EBITDA compared to $8.5 billion for the LTM ended 30 June), then further debt reduction would be necessary to maintain the Baa3 rating. Key credit metrics supportive of our Baa3 rating are gross debt/EBITDA leverage below 3.5x (currently 3.9x) and a ratio of retained cash flow (RCF) to gross debt of at least 16% (currently 14%).

RATINGS RATIONALE

ArcelorMittal's performance has turned down, as have our expectations for the second half of 2012. We expect the second half of the year to be adversely impacted by the sluggish global economy, lower steel prices, and cooling in China. We are estimating the company will have adjusted EBITDA of approximately $7.8 billion in 2012, with modest improvement expected in 2013. Based on 30 June 2012 adjusted gross debt of $32.8 billion, debt/EBITDA would be around 4.2x at the end of 2012, well above the 3.5x debt/LTM EBITDA target we have said is necessary for maintaining the Baa3 senior unsecured rating.

Moody's expects debt will be reduced in the second half of 2012. ArcelorMittal has been active in selling non-core investments and, in 2012, has closed on or announced disposals representing $1.5 billion in cash proceeds, with the majority of the proceeds used to repay debt. We expect further divestitures in the second half of the year but whether or not they'll be sufficient in size to get debt/EBITDA to 3.5x is not clear. Challenging industry conditions could affect buyers' appetites, financing capacity and valuations. And, if ArcelorMittal's cash from operations declines from the first half's $2.75 billion it will not fully cover anticipated second half capex ($2.15 billion) and dividends ($600 million), thereby consuming a portion of the cash raised via asset sales.

The $5 billion of debt reduction noted above is not an absolute debt reduction target but indicates the rough magnitude of debt reduction needed to get leverage to a level Moody's normally associates with a cyclical company operating in the down part of the business cycle. Other factors that will influence the rating in the near term include trends and outlook within the steel industry, the company's response to the operating environment in terms of asset sales and credit-protection measures, cash flow generation and liquidity.

ArcelorMittal's liquidity is strong and puts them in a good position to weather a downturn. The company has access to approximately $10 billion of credit facilities and had $4.5 billion of cash at 30 June. This compares to $5 billion of debt maturities over the next 18 months. Change in working capital is more likely to be a source than a use of cash over the next two quarters and free cash flow is likely to be close to breakeven if not positive.

Factors that support ArcelorMittal's Baa3 rating are its size, geographic and product diversification, growing iron ore operations, which support its own operations as well as provide an additional source of revenue, and strong liquidity. Additionally, company management is committed to retaining its investment grade rating.

The principal methodology used in rating ArcelorMittal, ArcelorMittal Finance and ArcelorMittal USA was the Global Steel Industry Methodology published in January 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

ArcelorMittal is the world's largest steel company. It operates approximately 65 integrated and minimill steel-making facilities in over 20 countries, which have a production capacity of around 125 million tonnes of crude steel per year. The company also has sizable captive supplies of iron ore and coal and a trading and distribution network. Over the last 12 months, the company shipped 83 million tonnes of steel and had sales of $93 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Steven P Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Olivier Beroud
Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes ArcelorMittal's rating outlook to negative from stable (Baa3 senior unsecured)
No Related Data.

 

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