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TEXT-S&P affirms ArcelorMittal 'BBB-/A-3' ratings; outlook negative
ArcelorMittal's financial performance was below our expectations in the past six months as the group only generated $3.4 billion in adjusted EBITDA and was not able to reduce its debt owing to an increase in pension obligations and lower working capital inflow than we previously assumed, and despite selling stakes in McArthur Coal and Turkish steelmaker Erdemir. We now treat the $1 billion mandatory convertible bond issued by ArcelorMittal through a subsidiary as having low equity content, following the extension of the original conversion date from 2012 until 2013, and include it in our adjusted debt calculation. As of March 30, 2012, adjusted debt was $41.1 billion and net reported debt $24 billion.
Under our base-case scenario we factor in EBITDA of $8 billion-$8.5 billion in 2012 and $9 billion in 2013 amid the sluggish macroeconomic environment in Europe (see Economic Research: No Fast Lane Out Of Europe's Recession, published on April 4, 2012, on RatingsDirect on the Global Credit Portal), to which the company is significantly exposed--Europe accounted for 49% of steel shipments and 20% of EBITDA in 2011. We also factor in somewhat stonger, but uncertain, growth in steel demand globally and our iron ore price assumption of $120 per tonne for the rest of 2012 and 2013. Our scenario reflects our view that profitability in the global steel industry, and especially in Europe, to which ArcelorMittal is very exposed, will remain weak compared with 2007-2008 because of overcapacity. Our forecast for 2012 and 2013 is, however, substantially above annualized EBITDA for the last six months of $6.7 billion, because we believe the last six months represented the bottom of the cycle with substantial destocking along the supply chain in the fourth quarter of 2011. We expect that volumes, capacity utilization, and profits will improve from the second quarter of 2012 and be underpinned by stronger economic growth in Europe at the end of the year. We also anticipate that the asset optimization program the group is currently implementing will have a moderately positive effect on profits in 2013.
Under our base-case scenario, we estimate FFO of about $6 billion-$6.5 billion in 2012 and about $7 billion in 2013. We anticipate that the group's FOCF after capital expenditure (capex) of $4 billion-$4.5 billion and dividends of $1.2 billion will be only moderately positive or neutral in 2012-2013. Under our scenario, and factoring in adjusted debt reduction to about $30 billion by the end of 2012, we expect FFO to debt to be above 20% by the end of 2012 and above 25% in 2013.
We continue to view the group's business risk profile as "satisfactory," as our criteria define the term, reflecting its leading global market positions with about 20% of EBITDA coming from Europe, 17% from North America, and 33% from emerging markets. ArcelorMittal also has greater product diversity than other steel companies, as 30% of its profits come from profitable and growing mining operations. Offsetting factors include the cyclicality of the steel industry, and the weak performance of the group's European operations in the sluggish economic environment.
We assess ArcelorMittal's liquidity as "adequate," under our criteria. We estimate that the ratio of sources of liquidity to uses is comfortably above 1.2x for the next 12 months. We also regard ArcelorMittal as having a track record of regular new bond issuances to lengthen its debt maturities, and sound relationships with banks. The group also has adequate headroom under the incurrence financial covenant in its bank lines, which limits net debt to EBITDA to 3.5x--reported net debt to EBITDA was 2.5x as of March 31, 2012. The group's bonds and key bank facilities don't contain rating triggers.
Liquidity sources as of March 31, 2011, include:
-- Retained cash of $4 billion, excluding $1.0 billion that we view as tied to operations;
-- A substantial $10.3 billion availability under medium-term committed bank facilities that expire in May 2015 and March 2016; and
-- FFO that we expect should cover capex and dividends.
This compares with the following liquidity uses over the next year:
-- Debt maturing in April-December 2012 of $2.7 billion, and $3.9 billion in 2013;
-- Annual capex of about $4 billion to $4.5 billion and stable annual dividend payments of about $1.2 billion, both of which we assume in our base-case scenario; and
-- $4 billion utilization under the true sales of receivables program that we treat as short-term debt.
ArcelorMittal's reported gross debt of $28.5 billion on Sept. 30, 2011, comprised $21 billion of bonds, $2.2 billion of convertible bonds, $1.1 billion of commercial paper, and $4.2 billion of bank and other loans. The main undrawn bank facilities are a EUR6.0 billion revolving credit facility (RCF), which expires in March 2016, and a $4 billion RCF that expires in May 2015.
All long-term rated debt issued by ArcelorMittal and its subsidiaries is rated 'BBB-', in line with the long-term corporate credit rating on the group. The biggest borrower by far is the parent company ArcelorMittal, which significantly offsets the risks of structural subordination. Priority liabilities, including subsidiary debt, trade payables, and other liabilities, are moderate, in our view, and mitigated by the group's size and diversification.
The negative outlook reflects the likelihood of a downgrade during the next 12 months if the group fails to demonstrate that it is on a firm track to restore cash flow coverage measures to a level in line with its ratings, including a ratio of FFO-to-adjusted debt of 25% by mid-2013. This will need to include very proactive management of the company's asset base and liabilities by the end of 2012, leading to a very substantial decline in debt. The ratings would likely be cut if there was a significant weakening in steel industry conditions compared with our base-case scenario.
We could change the outlook back to stable if and when:
-- The group deleveraged and achieved an FFO-to-debt ratio above 25% on a consistent basis, assuming an iron ore price of $120 per tonne; and
-- The macroeconomic and steel industry environments improved.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Methodology And Assumptions On Risks In The Metals Industry, June 22, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Corporate Credit Rating BBB-/Negative/A-3
Senior Unsecured BBB-
Commercial Paper A-3
Corporate Credit Rating BBB-/Negative
Senior Unsecured BBB-
ArcelorMittal USA Inc.
Corporate Credit Rating BBB-/Negative/--
Senior Unsecured* BBB-
*Guaranteed by ArcelorMittal
Ispat Inland ULC
Senior Secured* BBB-
*Guaranteed by ArcelorMittal and ArcelorMittal USA Inc.
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