ArcelorMittal’s bonds plunged and its shares fell the most since September after the company had its debt rating cut to junk by Standard & Poor’s, a week after saying an investment grade was a “strategic priority.”
The world’s biggest steelmaker’s long- and short-term ratings were cut to BB+/B from BBB-/A-3 by S&P, which cited uncertainty about its debt reduction plan and a weakening steel industry. ArcelorMittal said the downgrade was driven by a change in S&P’s view of the “macro-economic environment.”
ArcelorMittal is seeking to cut its debt even as the steel industry is roiled by deteriorating global growth that is eroding demand. Steelmakers are reporting lower earnings as the European crisis deepens and commodity prices weaken amid slowing Chinese economic growth. The company’s net debt was $22 billion at the end of the second quarter.
“We have various measures in place and a clear road-map to reduce debt,” spokeswoman Nicola Davidson said in a telephone interview today. “Investment-grade rating is important to us and we will continue to follow a financial strategy based around achieving investment-grade status.”
While the company has no immediate plans to alter its debt reduction strategy, ArcelorMittal will not “rule anything out,” Davidson said.
The company’s $1.4 billion of 4.5 percent notes maturing in February 2017, which traded as high as 101.2 cents on the dollar in May, dropped to 95.4 cents at 3:44 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the lowest since the bonds were sold in February. ArcelorMittal dropped 8.8 percent to 11.905 euros by the close in Amsterdam trading, the biggest slump since Sept. 22.
ArcelorMittal is selling assets, moving production to more cost-efficient sites and idling some plants to cut its obligations. A further reduction in net debt is targeted by the end of 2012, the company said last week. A ratings downgrade would cost about $100 million a year in interest payments, it said.
Aditya Mittal, chief financial officer of the Luxembourg-based company, said last week that an investment-grade rating was “appropriate” for a company of ArcelorMittal’s size and that retaining one was a “strategic priority.”
The cost to guard against losses on the debt of ArcelorMittal surged to the highest since January, with credit-default swaps tied to the company jumping 93.6 basis points to a mid-price of 583.4 basis points at 4:02 p.m. in New York, according to prices compiled by Bloomberg. The contracts closed at 590.1 basis points on Jan. 9.
High-risk, high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.