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Rating Action:

MOODY'S ASSIGNS PRIME-2 RATING TO ARCELOR FINANCE; CONFIRMS Baa2 LONG TERM SENIOR UNSECURED RATINGS FOR ARCELOR GROUP, OUTLOOK STABLE.

22 Nov 2002
MOODY'S ASSIGNS PRIME-2 RATING TO ARCELOR FINANCE; CONFIRMS Baa2 LONG TERM SENIOR UNSECURED RATINGS FOR ARCELOR GROUP, OUTLOOK STABLE.

Approximately $2.0 Billion of Debt Securities Affected.

Frankfurt, November 22, 2002 -- Moody's Investors Service today assigned a Prime-2 short term rating to Arcelor Finance SCA for its Euro 2 billion Billet de Tresorerie (Commercial Paper) program, which will replace Usinor's Euro 1.5 billion Billet de Tresorerie Program (rated Prime-2). At the same time, the rating for the Euro 600 Mio Eurobond due in 2008 of Usinor was confirmed after the announcement of the planned transfer of the bond from Usinor to Arcelor Finance. The Baa2 rating for Usinor's US$ 300 Mio Yankee Bond due in 2006 was also confirmed in anticipation of near term measures to ensure, that these bonds will benefit from the full credit of the Arcelor group. The Baa2 rating for Usinor's largely exchanged convertible Eurobond due in 2006 was withdrawn. The outlook for the ratings is stable.

The ratings reflect Arcelor's strong European positioning and diversification within the steel sector, expected further performance improvements as a result of price increases and realization of synergies and cost cutting, which are to be achieved by further integration of the three predecessor companies. Management's focus on debt reduction and the progress achieved in centralizing the group's debt structure are also factored into the rating. Concerns remain regarding the state of the steel industry with continued over-capacities, soft demand trends, rising scrap costs as well as a potential for renewed weakening in steel prices. Over the longer term, pressures from steel producers in lower cost countries and a prolonged softening in industry trends could lead to additional restructuring needs, legacy costs and asset write-offs, which could weaken Arcelor's financial profile.

Today's rating action reflects Arcelor's recent steps to centralize its debt structure and ensure common credit quality and pari-passu ranking of debtors within the group. Moody's notes that Arcelor Finance, the issuer of the new CP program and the proposed new issuer of the EURO 600 Mio Eurobond (2008) will function as the group's main financing company going forward supported by the full liability of the four central group companies. Moody's understands that management plans to centralise the group's financing structure to reduce remaining structural subordination issues to a moderate extent capping subsidiary borrowing at maximum of 20% of group debt.

With regards to the legal structure of Arcelor Finance, Moody's believes that the company is a limited partnership with shares ("societe en commandite par actions") incorporated in Luxembourg with four fully liable partners, Arcelor SA, the ultimate holding company, and the three amalgamation partners Usinor, Arbed and Aceralia. Moody's notes that the four partners are jointly, severally and indefinitely liable for any debts of Arcelor Finance, that cannot be satisfied by Arcelor Finance and for which a notification to pay has been received from the creditor. In the unexpected case, that a partner should leave the partnership, he would continue to be liable for any debts incurred during the time he was a partner.

In terms of ranking, it is Moody's understanding that the corporate liability for Arcelor Finance should rank pari-passu with debt of the individual partners, namely Arcelor, Aceralia, Arbed and Usinor. Any debt, which is issued individually by any of the four partners and is supported by a guarantee from Arcelor Finance, would also benefit indirectly from the full liability of the three other partners. Based on the above, Moody's expects structural subordination issues to remain soley with regards to debt raised by operating subsidiaries of the partners. Upon completion of the centralization and reorganization of Arcelor's debt, such subsidiary borrowings should remain moderate as a percentage of group debt.

Arcelor's liquidity situation is supported by the company's policy to cover all funding needs by committed financing instruments and keep sufficient headroom available under committed credit lines or cash to cover refinancing needs under the CP program. The group is currently in the process to negotiate the transfer of a significant part of its financing agreements to the new Arcelor Finance entity. It is Moody's expectation that the new loan agreements would provide sufficient headroom and flexibility in its covenant structure and not expose the company to confidence sensitive funding.

The stable outlook for the ratings is based on Moody's expectations that announced price increases in flat carbon will support the group's profit development over the next quarters and help offset weakening trends in stainless steel and margin pressures in long products reflecting higher scrap prices. In addition, further efficiency and performance improvements are expected from tight cost management and further synergies to be realized in relation with the merger. Furthermore, Moody's expects the group's debt reduction efforts to continue sourced by improved working capital management and operating cash flow generation in order to increase the group's flexibility going forward.

Arcelor is the world's largest steel group with leading market positions in flat carbon steel and stainless steel. The group generated annual pro-forma sales of Euro 27 billion in 2001 and has nearly 108,000 employees worldwide.

Frankfurt
Wolfgang Draack
Senior Vice President
European Corporates Group
Moody's Deutschland GmbH
+49 69 707 30 700

Frankfurt
Renate Labak
Vice President - Senior Analyst
European Corporates Group
Moody's Deutschland GmbH
+49 69 707 30 700

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