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Global Credit Research - 24 Feb 2017
London, 24 February 2017 -- Moody's Investors Service has upgraded to Ba1 from Ba2 the corporate family rating (CFR) and to Ba1-PD from Ba2-PD the probability of default rating (PDR) of ArcelorMittal, the world's largest steel producing company. At the same time, Moody's upgraded to Ba1 from Ba2 the company's senior unsecured ratings and affirmed its Not Prime short-term ratings. The outlook on all the ratings is stable.
"Our upgrade to Ba1 reflects ArcelorMittal's strengthening credit profile and continued improvement in market conditions since we stabilised the outlook last August, as well as its significant deleveraging effort, which resulted in the reduction of Moody's adjusted leverage to 3.9x at the end of 2016 from 6.5x at the end of 2015, good liquidity and the company's return to be free cash flow positive. We also expect ArcelorMittal's credit metrics to remain solid into 2018 as demand picks up in its markets," says Hubert Allemani, a Moody's Vice President -- Senior Analyst and lead analyst for ArcelorMittal.
A full list of affected ratings is provided towards the end of this press release.
RATINGS RATIONALE
Today's action reflects the marked improvement in ArcelorMittal's profitability in 2016 in an improved pricing environment with a reported EBITDA of USD6.2 billion compared to USD5.3 billion in 2015. ArcelorMittal's EBITDA margin increased to 11% compared to 8.2% in 2015, supported by the company's Action 2020 program and higher EBITDA per ton of USD75 achieved in 2016 compared to USD62 in 2015. At the same time, the company lowered its total reported indebtedness to USD13.7 billion at end-2016 from USD19.8 billion at end-2015, which strengthen the company's balance sheet and position it better in the rating category.
Moody's expects that ArcelorMittal will be able to maintain its current profitability level this year because of expected demand increase in all regions served by the company with notably improvement expected in Brazil after two years of recession. The pricing environment in the US and Europe should help stabilise profitability at higher levels in future despite the ongoing risk of price deflation due to imports. However, the trade protections in the US and Europe should benefit ArcelorMittal giving the company more pricing power and helping it to capture the expected demand growth. Moody's anticipates that ArcelorMittal's Moody's-adjusted EBITDA will stabilise at approximately USD6.5 billion in 2017 with a clear upside potential towards USD7 billion.
The company is expected to remain free cash flow (FCF) positive in 2017 in the range of USD300 million to USD350 million, despite anticipated working capital requirements of approximately USD1 billion and increased capex to a guided level of USD2.9 billion compared to USD2.4 billion in 2016. This should partially be compensated by savings on interest of USD200 million compared to 2016 because of the lower debt level.
ArcelorMittal's Ba1 rating reflects its (1) strong market position in the global steel industry; (2) strong geographical and product diversification, which helps the company adapt to regional market conditions; (3) partial vertical integration into iron ore and coking coal, which mitigates the company's exposure to increase in raw materials prices; and (4) strong liquidity profile.
However, the rating also reflects (1) uncertainties around the recovery of the Brazilian market and increasing difficulties exporting production out of Brazil due to rising global competitiveness and import duties; (2) the high level of competition from imported products from Asia into the US and Europe, which affects pricing discipline and might lower market share; and (3) the company's low Moody's-adjusted EBIT margin of 4.9% at end-2016.
LIQUIDITY
ArcelorMittal's liquidity is good and expected to remain strong this year. At end-2016, the company's available liquidity amounted to approximately USD8.1 billion, consisting of USD2.6 billion of cash and cash equivalents, and USD5.5 billion of undrawn committed revolving credit facilities (RCF). Moody's notes that the RCF, split into two tranches, was successfully renewed in December 2016 and extended until 2019 and 2021. The company can also rely on approximately USD500 million of short-term credit facilities to cover its working capital needs and a EUR350 million "Finance Contract" with the European Investment Bank in order to finance European research and development projects. We expect the company to be free cash flow positive in the range of USD300 million to USD350 million.
The company's maturity profile has improved following the debt repayment made during 2016, which targeted mostly short-term maturities. The average debt maturity is now seven years with approximately USD1.9 billion of maturities per year falling due in 2017 and USD1.6 billion in 2018.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that the company's financial metrics will remain in line with current rating for the next 12 months. Notwithstanding the rebound of a number of steel product prices from the low levels seen at the end of 2015 and Q1 2016, Moody's expects that steel prices will remain under pressure for the remainder of the year.
Finally Moody's expects that any potential M&A activity will not significantly negatively affect the company's profitability or positive free cash flow target.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's could upgrade the ratings if (1) Moody's adjusted leverage were to trend below 3.0x on a sustainable basis; (2) ArcelorMittal's profitability were to improve with its Moody's adjusted EBIT margin to increase to levels above 8%; (3) the company's cash from operation minus dividend (CFO-div) /debt were to move towards 25%; and (4) the company is free cash flow positive on a sustainable basis.
Moody's could downgrade the rating if (1) the company's profitability falls with its Moody's-adjusted EBIT dropping below 6%; (2) ArcelorMittal's Moody's-adjusted leverage remains consistently above 4.0x debt/EBITDA; (3) its (CFO-div) /debt decreases below 15%; (4) it pursues M&A activity resulting in higher leverage and (5) the company is free cash flow negative over multiple years.