S&P downgrades ArcelorMittal in steel sector slump

NEW YORK, June 5 (Reuters) - Standard & Poor's on Friday downgraded ratings on ArcelorMittal (ISPA.AS) [ARCMT.UL], and said the downturn in the steel sector is weighing heavily on the world's largest steelmaker.

S&P cut ArcelorMittal's corporate credit rating by one notch to BBB, or two notches above speculative, or "junk" status. The outlook is negative, meaning it could downgrade the rating again within 12 to 18 months.

"Like its peers, ArcelorMittal is experiencing a broad and severe weakening of its operating performance, caused by very difficult market conditions in the steel sector," analyst Alex Herbert said in a statement.

"This is evident in sharply reduced capacity utilization, shipments, and steel prices."

Conditions appear to be stabilizing, but are likely to remain weak, said Herbert. The company has a ratio of funds from operations to adjusted debt of about 35 percent, he said.

ArcelorMittal has responded to the slumping market by reducing production, cutting costs, scaling back working capital, capital expenditure, dividends and debt, said the analyst. It has lengthened debt maturities and raised $3.2 billion of new equity.

"These actions are, however, not sufficient in our view to fully mitigate the negative effects of the downturn," he said.

S&P is expecting the company's 2009 operating performance to be significantly weaker than 2008, with lower cash flow and substantial adjusted debt impairing its ability to reduce the ratio of FFO to debt.

There is also a possibility that the company may breach a 3.5 times net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) financial covenant, which is tested on a half-yearly basis, said Herbert.

In the first quarter, the company posted EBITDA of just $380 million, down sharply from $5 billion a year earlier.

FFO was a negative $1.2 billion, after a positive $3.2 billion the year earlier.

Liquidity remains adequate for the company's new rating. The company had about $4 billion in cash and undrawn bank lines of about $7.6 billion at end March, enough to cover short-term debt of about $7.6 billion.

Since March, it has lowered high debt maturities to $5.4 billion from $8.1 billion and raised about $8 billion in medium-term senior unsecured bonds as well as the $3.2 billion in new equity. (Reporting by Ciara Linnane; Editing by James Dalgleish)