The world’s largest steel manufacturer ArcelorMittal (Ba2 negative) announced that it has fully underwritten an equity raise of $3.0 billion and has sold its 35 per cent stake in JV Gestamp Automoción, S.A. (Ba3 Stable) for a total consideration of €875 million.
The two announcements are credit positive because they will strengthen ArcelorMittal’s balance sheet and will allow the company to reduce debt. Reduction in debt would also contribute to improve free cash flow with a reduction in the annual cash interest charge.
The expected reduction of leverage, however, is offset by the further deterioration of ArcelorMittal operating performance. As a result of falling steel and iron ore prices, EBITDA as reported by the company has fallen in 2015 to $5.2 billion from $7.2 billion in 2014. The company’s guidance for 2016 is in excess of $4.5 billion.
Pro forma for the asset sale and the rights issue, we expect that ArcelorMittal’s full-year 2015 gross leverage ratio would decrease by approximately one turn to 5.0x, based on our assumptions that (1) the company will apply all the proceeds to reduce its gross reported debt (to $15.8 billion from $19.8 billion as of December 31, 2015); (2) EBITDA is $5.3 billion after Moody’s adjustments in 2015, and (3) total debt after Moody’s adjustments of $26.8 billion.
However, the reduction in leverage may not be sustainable in 2016. For the full-year 2016, ArcelorMittal has announced a guidance for its EBITDA in excess of $4.5 billion, which is 14 per cent lower than the 2015 EBITDA reported by the company.
Based on the company’s guidance and Moody’s standard adjustments to EBITDA, we expect that the company’s the debt/EBITDA ratio would revert to a level close or above 6.0x at the end of 2016.
At this level, ArcelorMittal’s gross leverage remains high for the rating category. On the longer term, the company will be better positioned to weather the prolonged pressure on prices. The proposed five year strategic roadmap and associated improvement in EBITDA should enable the company to reduce leverage from 2017.
