ArcelorMittal to Struggle to Shed Junk Debt Rating, Moody’s Says

ArcelorMittal, the largest steelmaker, will struggle to restore an investment grade for its bonds and may need to reduce debt by more than Moody’s Investors Service has previously targeted, the ratings company said.

“It’s not going to happen very quickly, meaning in the next six months,” Steve Oman, Moody’s lead analyst on the European steel industry, said in an interview. “If they reduce debt by a sizable amount that would certainly help. But in the absence of a meaningful improvement in the steel industry, it’s going to be pretty hard.”

ArcelorMittal’s rating was cut to junk on Nov. 6 by Moody’s, which said the debt reduction required by the steelmaker to keep its investment grade was “so large as to be unachievable.” The company’s senior unsecured note rating was lowered to Ba1 from Baa3 with a negative outlook.

Standard & Poor’s cut its rating on Luxembourg-based ArcelorMittal’s debt to below investment grade on Aug. 2, citing a weakening industry and lack of clarity over the company’s plans to curb borrowings. Moody’s said at the time it would follow suit unless ArcelorMittal reduced debt by about $5 billion before the end of the year.

“We held off on the downgrading ArcelorMittal in anticipation of a lot of debt reduction, which we still expect,” London-based Oman said yesterday. “But the number in order to satisfy what is appropriate for a Baa3 was just getting so high as to be unachievable. However, a sizable debt reduction could lead us to change our outlook to stable. The number would be quite a bit larger than the $5 billion.”

Profit Slump

ArcelorMittal reported the lowest quarterly profit in almost three years on Oct. 31 and cut its 2013 dividend by 73 percent to save about $1 billion. Chief Executive Officer Lakshmi Mittal is selling assets and moving output to cheaper sites and idling plants. The company said before the cut that it’s investment grade rating was important.

Excluding proceeds from any further asset sales, net debt will be about $22 billion at the year-end, ArcelorMittal said last week. The company reported debt of $23.2 billion at the end of the third quarter.

ArcelorMittal said Nov. 6 after the Moody’s downgrade that its financial position remains “robust” and that it expects to see further progress in the coming months.

The company said in July it was selling 48 percent of engineering company Paul Wurth Group to SMS GmbH for 300 million euros ($380 million) and in May agreed to sell Skyline Steel LLC to Nucor Corp. for about $605 million. It’s also considering divesting a stake of about 30 percent in its Canadian iron-ore unit, according to a person with knowledge of the matter.

“Steel industry conditions have slipped since we gave them a negative outlook in August and we didn’t see any likelihood of any quick improvement, perhaps not even into the first part of 2013,” said Oman. “I do think they will still go through with asset sales and debt reduction. Perhaps the downgrade changes their thinking, but I’ve no reason to think it would. Nevertheless, it raises the possibility that they might rethink what the company needs to do .”

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