TEXT-Fitch cuts ArcelorMittal to 'BBB-'; outlook negative
(The following statement was released by the rating agency)
Aug 08 - Fitch Ratings has downgraded Luxembourg-based ArcelorMittal S.A's (AM) Long-term Issuer Default Rating (IDR) and senior unsecured ratings to 'BBB-' from 'BBB' and affirmed its Short-term IDR at 'F3'. The Outlook on the Long-term IDR is Negative.
The downgrade reflects the challenging short-term outlook for steel markets, particularly in Western Europe, which will mean a slower rate of debt reduction over the next two to three years compared to previous expectations. While AM continues to make good progress with non-core asset disposals and its cost-saving programmes, these measures will not fully offset the negative impact of weaker organic cash flow generation.
AM moderately underperformed Fitch's expectations over H112 with the agency now expecting 2012 FFO gross leverage to be around 3.3x with EBITDA margins weakening to below 10%. Fitch expects cash proceeds from asset disposals in 2012 to be applied to the reduction of gross debt levels which are expected to total USD23bn at year end. Fitch expects AM to remain marginally free cash flow positive in aggregate over 2012-15.
Fitch acknowledges that AM's plans to increase capacity utilisation at lower-cost production facilities, close higher cost plants and increase mining capacity over the medium term should help improving profitability, diversification and internal self-sufficiency. However, AM will need to demonstrate that these steps are sufficient to increase its EBIT margin above 5% and reduce its leverage below 3.0x FFO by end-2014 to sustain the current rating level.
AM continues to actively manage its debt maturity profile and the group's liquidity position remains sound for the rating level. Liquidity as at H112 totalled USD14.8bn, comprising USD4.5bn of cash (approximately USD500m of which would be considered as not readily accessible) and USD10.3bn of undrawn credit lines, compared to an aggregate USD5bn of debt maturing by the end of FY13.
The Negative Outlook reflects Fitch's view that AM's credit metrics will remain weak for the 'BBB-' rating level over the next two years to end-2013, before recovering thereafter. Supporting this recovery will be the company's asset disposal and asset optimisation programmes. While some execution risk remains, a number of measures under these programmes have already been announced and are in progress.
AM's investment-grade ratings continue to reflect its core strengths including its scale as the world's largest steel producer and healthy vertical integration. Further strengths include its leading market positions in most key steel-consuming regions, significant product and geographic diversification, competitive operating cost positions in the various regions in which it operates, and strong participation at all stages of the steel value chain from ownership of raw materials to control of its own distribution networks.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Negative rating action could result if the trend in AM's credit metrics does not indicate that FFO gross leverage of 3.0x and an EBIT margin of 5% can be achieved by 2014. Fitch would also expect FCF generation to remain neutral over the next three years.
Positive: A positive rating action could be considered if the company significantly deleverages including FFO gross leverage below 2.5x and EBIT margins recovering to above 8%.
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