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Rating Action:

Moody's upgrades ArcelorMittal's ratings to Baa3; stable outlook

22 Jun 2018

London, 22 June 2018 -- Moody's Investors Service (Moody's) has today assigned a Baa3 long term issuer rating to ArcelorMittal, the world's largest steel producing company. The outlook on the rating is stable.

"Today's upgrade reflects our expectation that ArcelorMittal will continue to reduce leverage on the back of improved earnings and operating cash flow, and that it will preserve its strengthened financial profile by prudently managing any future investments and M&A," says Gianmarco Migliavacca, Vice President Senior Credit Officer and the lead analyst for ArcelorMittal.

Moody's has also withdrawn ArcelorMittal's corporate family rating (CFR) of Ba1 and probability of default rating (PDR) of Ba1-PD following its upgrade to Baa3, as per the rating agency's practice for corporates with investment grade ratings. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

Concurrently, Moody's has assigned a short term issuer rating of P-3 and upgraded the group's senior unsecured instrument rating to Baa3 from Ba1, the short-term rating on its Commercial Paper to P-3 from NP, the senior unsecured rating on the company's medium-term notes (MTN) programme to (P)Baa3 from (P)Ba1 and its other short-term rating to (P)P-3 from (P)NP.

A full list of affected ratings can be found at the end of this Press Release.

RATINGS RATIONALE

The upgrade of ArcelorMittal's ratings to Baa3 reflects Moody's expectation that the company will maintain strong operating performance and will continue to reduce its leverage to be able to maintain investment grade metrics under a number of stress scenarios across the cycle. Management's focus on strengthening the balance sheet, coupled with strong current trading results expected in H1 2018 after a solid Q1, should create the financial flexibility to deliver this.

For 2018, the rating agency expects that ArcelorMittal's adjusted gross leverage will improve towards 2.2x from 2.8x at the end of 2017. Such improvement would be mainly driven by a 25% year-on-year increase of its 2018 adjusted EBITDA to $10.7 billion from $8.6 billion in 2017. The ratio of Cash Flows from Operations (CFO) net of dividends to adjusted debt should exceed 25% in 2018 versus 20% in 2017 based on improved CFO and negligible dividends being paid.

Moody's expects that the company will commit to not pay any meaningful dividend before it has reached its net debt target of $6 billion (from c.$11bn as of March 2018), which Moody's believes could occur as early as the end of 2019 assuming the company generates positive free cash flow (FCF) in excess of $2.5 billion in both 2018 and 2019. Positive FCF and large committed credit facilities should strengthen further the company's liquidity position, which Moody's considers as good.

The rating agency's expectation of a stronger financial profile for ArcelorMittal is underpinned by the assumption of operating conditions remaining supportive across all the main markets in which the company is established, with (1) materially improved conditions in the US following the introduction of a 25% tariff against steel imports since March 2018; (2) ongoing recovery in Brazilian steel spreads; and (3) stable spreads in Europe assuming stronger average H1 2018 levels compensating for slightly weaker anticipated H2 average levels.

Moody's assumes that any major threat from rising imports being deflected into Europe from the US as a result of the US tariffs would likely be addressed by new safeguard measures being introduced by the European Commission in due course during H2 2018 to protect the European steel industry.

ArcelorMittal should continue to report strong profitability in Europe at least until Q3 2018 since the majority of its volumes, especially for flat products for automotive applications, have been already contracted at the high H1 2018 price levels. Any possible temporary weakness in ArcelorMittal's European performance beyond Q3 2018 should be more than offset by record high profitability levels expected from ArcelorMittal's US plants.

In anticipation of fast improving profitability, Moody's changed its outlook on the US steel industry from stable to positive in May 2018. Based on such an improved regional industry outlook, Moody's expects that 25% of ArcelorMittal's 2018 EBITDA will come from the NAFTA region versus 20% in 2017, while Europe should contribute around 38% of 2018 EBITDA versus 41% in 2017. The rest of 2018 EBITDA should be generated almost evenly from Mining (14%), Brazil (13%) and ACIS (13%), with Brazil expected to contribute proportionally more vs 2017.

Moody's expects operating conditions in the steel markets to remain stable in 2019 across all the main geographies where ArcelorMittal operates, which in turn would sustain its performance and credit metrics at comfortable levels for its Baa3 rating.

The structural rebalancing of steel demand and supply taking place in China as a result of the ongoing supply-side reforms should continue to support industry fundamentals elsewhere, considering that China accounts for more than 50% of global steel consumption and production.

Trade frictions following the introduction of the US tariffs would impact international steel trade flows but this should not have any material impact on ArcelorMittal since it can supply all its main domestic markets almost exclusively from its domestic plants, with almost no reliance on imports from plants located elsewhere. The current US tariffs and possible new safeguard measures protecting the European markets would benefit ArcelorMittal's large operational footprint in both regions.

The rating action is also underpinned by Moody's expectation that forthcoming M&A activity will be funded by the company in a prudent way and without compromising its public commitment to an investment grade rating. In particular, the acquisition of Ilva for EUR 1.8bn, which should close in Q3 2018, should have only a minor temporary negative impact on ArcelorMittal's leverage and liquidity because Ilva is small compared to ArcelorMittal.

Similarly, Moody's expects that a possible acquisition of Indian steelmaker Essar Steel -- should ArcelorMittal's bid be successful -- would be structured in a way to have only a limited financial impact. The formation of a joint-venture with Nippon Steel & Sumitomo Metal Corporation (Baa1 stable) to bid for Essar Steel should dilute any possible large financial commitment ArcelorMittal would otherwise have to face should it have chosen to pursue the bid alone.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on the ratings reflects Moody's view that ArcelorMittal will continue to use its cash flow generation and cash balances to reduce debt and build resilience in its financial profile, and that investment and M&A commitments, such as for Ilva and possibly Essar Steel, will be managed prudently.

The outlook also reflects Moody's expectation that ArcelorMittal's financial policy will continue to prioritize an investment grade financial profile over shareholder returns, while focusing on further deleveraging to maintain an adjusted gross leverage below 3x under a number of stress scenarios.

WHAT COULD CHANGE THE RATING UP / DOWN

The rating could be upgraded if Moody's expects it to sustain lower financial leverage, strong cash flow generation and coverage of debt through the cycle, with adjusted gross debt/EBITDA trending towards 2.0x and (CFO-Dividend) /debt above 30% on a sustained basis. A possible upgrade would also require evidence of a smooth integration of Ilva, a longer track record of prudent financial policies balancing the interests of creditors and shareholders, and a degree of resilience to the impact of trade tariffs. In the short term we expect the company's metrics to benefit from the tailwinds for the sector, and for emerging headroom in the metrics to be applied towards meeting deleveraging targets, accommodating M&A opportunities such as Essar. An upgrade would also be underpinned by strong liquidity backed by positive FCF generation.

A reversal of the deleveraging trend, resulting in ArcelorMittal sustaining higher leverage with (CFO-Dividend) / debt consistently below 20% and debt/EBITDA materially exceeding 3x would put negative pressure on the Baa3 ratings. Unanticipated material execution risk from the acquisition of Ilva and/or the potential acquisition of Essar Steel resulting in protracted underperformance and weaker liquidity at group level would also exert negative rating pressure.

The principal methodology used in these ratings was Steel Industry published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

ArcelorMittal is the world's largest steel producing company, with an annual production of more than 90 million tons of crude steel and steel shipments of 85 million tons in 2017. The company operates in more than 60 countries worldwide, with steel manufacturing plants in 20. For the full year 2017, the company reported revenue of $68.7 billion and an EBITDA of $8.4 billion (12.2% margin). ArcelorMittal is listed and its market capitalisation was around $33bn in mid-June 2018. The main shareholder is the Mittal family, with a 37.4% stake in the company.

Assignments:

..Issuer: ArcelorMittal

....Long-Term Issuer Rating, Assigned Baa3

....Short-Term Issuer Rating, Assigned P-3

Upgrades:

..Issuer: ArcelorMittal

....Commercial Paper, Upgraded to P-3 from NP

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)Baa3 from (P)Ba1

....Other Short Term, Upgraded to (P)P-3 from (P)NP

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba1

Withdrawals:

..Issuer: ArcelorMittal

.... Probability of Default Rating, Withdrawn , previously rated Ba1-PD

.... Corporate Family Rating, Withdrawn , previously rated Ba1

Outlook Actions:

..Issuer: ArcelorMittal

....Outlook, Changed To Stable From Positive

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gianmarco Migliavacca
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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