Research Update: Steel Group ArcelorMittal Upgraded To 'BBB-' On Decreasing Debt And Solid Performance; Primary Credit Analysts: Simon Redmond, London (44) 20-7176-3683; simon.redmond@spglobal.com Elad Jelasko, CPA, London (44) 20-7176-7013; elad.jelasko@spglobal.com Secondary Contact: Tommy J Trask, Dubai (971) 4-372-7151; tommy.trask@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Issue Ratings Related Criteria Related Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 1
Research Update: Steel Group ArcelorMittal Upgraded To 'BBB-' On Decreasing Debt And Solid Performance; Outlook Stable Overview ArcelorMittal's credit profile has been strengthening due to its prudent balance-sheet management and the supportive conditions across its key markets. Because of these supportive conditions and the company's plan to reduce its net debt to $6 billion, we believe its credit metrics will increasingly exceed our minimum thresholds for a 'BBB-' rating. As a result, we are raising our long-term corporate credit and issue-level ratings on ArcelorMittal to 'BBB-' from 'BB+'. The outlook is stable, as supportive steel and iron ore market conditions as well as the company's efficiency measures are bolstering rating resilience. Rating Action On Feb. 1, 2018, S&P Global Ratings raised its long-term corporate credit rating on global integrated steel producer ArcelorMittal to 'BBB-' from 'BB+' and assigned a stable outlook. At the same time, we raised the short-term corporate rating to 'A-3' from 'B'. We also raised our issue-level ratings on ArcelorMittal's unsecured debt to 'BBB-' from 'BB+'. Because these ratings are now investment grade, we have withdrawn the associated recovery ratings. Rationale ArcelorMittal has committed to continue reducing its net debt to $6 billion. This will further strengthen the resilience of its balance sheet through industry cycles. The company has already reduced its debt materially, with reported net debt falling by $1 billion in 2017 to $10.1 billion as of Dec. 31, 2017. ArcelorMittal will continue to prioritize free cash flow not needed for working capital toward debt reduction, which is consistent with management's explicit commitment to achieving and maintaining investment-grade ratings. We forecast discretionary cash flow after capital expenditure (capex) and dividends of at least $1.5 billion in 2018. After preliminary financial adjustments, ArcelorMittal's ratio of funds from operations (FFO) to debt was 27.2% at year-end 2017, which is above our WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 2
minimum threshold of 25% for a 'BBB-' rating. Importantly, however, we project that this ratio will improve to at least 30% over 2018 and 2019. We see the supportive conditions in ArcelorMittal's key markets--namely Europe, NAFTA, and Brazil--continuing into 2018. Specifically, we forecast 2018 GDP growth of 2.1%, 2.7%, and 2.2%, respectively, in those regions. We expect steel demand growth to be on a par with these levels in Europe and NAFTA and in mid-single digits in Brazil, from a low base. In Europe, demand across the construction, manufacturing, and automotive sectors is continuing to expand. Moreover, steel inventory levels are generally below average, implying that end-user demand growth could be supplemented by some re-stocking. In addition, price increases have continued to absorb the rising costs of raw materials such as coal and iron ore. China is a key sector driver, and high margins there are likely to remain supportive for the global industry--eu and U.S. import tariffs notwithstanding. Reported Chinese steel production capacity reductions of about 20% (including winter pollution-control measures) have resulted in improved utilization and domestic profitability there. We now project ArcelorMittal's EBITDA to be at least $8.5 billion for full-year 2018, up from $6.3 billion on an underlying basis in 2016. This increase reflects growing shipments, stronger average group steel margins, and the benefits of ArcelorMittal's 2020 efficiency projects. We continue to assess steel markets as highly volatile despite our forecast of prevailing strong performance continuing in 2018. ArcelorMittal is exposed to the cyclical and capital-intensive nature of the steel sector, balanced by the company's large scale and the diversity of its operations. This is supported by ArcelorMittal's partial vertical integration into iron ore and, to a lesser extent, coal. In 2017, with production of 93.1 million tonnes of steel and own iron ore production of 57.4 million tonnes, ArcelorMittal remained the largest steel producer. Base case assumptions: A 2%-3% increase in steel shipments in 2018 in line with growth trends in key markets, with average annual pricing at least in line with 2017 but some softening of demand and pricing in 2019. Iron ore prices of $55 per tonne in 2018 and $50 per tonne for 2019, with high-single-digit volume increases. EBITDA of $8.5 billion-$9.0 billion in both 2018 and 2019. Capex of up to $3.8 billion per year, including Ilva- and Mexico-related spending; and Modest equity dividend payments of $100 million in 2018. We see dividends received broadly covering distributions to minority owners. Based on these assumptions, we arrive at the following credit metrics: FFO to debt of 30% in 2018 and about 30% to 35% in 2019; An adjusted debt-to-ebitda ratio of below 3.0x in 2018 and 2019; and Sustained positive cash-flow generation after working capital and WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 3
investments, with discretionary cash flow above $1.5 billion in 2018 and 2019. Liquidity ArcelorMittal's liquidity is strong, supported by limited short-term maturities, committed lines, and positive FOCF. We estimate the ratio of sources of liquidity to uses at above 1.5x for the 12 months from Jan. 1, 2018, and above 1.0x for the subsequent 12 months. We also factor in our view of ArcelorMittal's generally prudent risk management, including liability management, and demonstrated access to bank funding and capital markets. We project that the company should be able to maintain significant headroom under the covenants of its medium-term bank facilities. For the 12-month period from Jan. 1, 2018, we estimate the following principal liquidity sources: Cash of $2.8 billion; $5.5 billion availability under medium-term committed bank facilities that expire in December 2019 and December 2020; and Unadjusted FFO of $6.0 billion-$7.0 billion. For the same period, we calculate the following principal liquidity uses: Short-term debt maturities of $2.8 billion; Capital investment of about $3.8 billion (in line with company guidance); Up to $2.0 billion of intra-year working capital fluctuations, including a portion of the under true-sales-of-receivables commercial paper programs that we treat as short-term debt. In addition, a working capital requirement of $1.0 billion; Net dividend outflows of about $100 million; and Ilva-related pre-closing lease payments of about $0.2 billion. Outlook The stable outlook reflects our view that ArcelorMittal's commitment to reduce net debt to $6 billion is rapidly bolstering rating resilience and mitigating the impact of potential future industry downturns. This focus on balance-sheet strengthening is supported both by our expectation of 2018 market conditions generally at least in line with those of 2017 and by ArcelorMittal's efficiency programs. In our base case, we forecast FFO to debt of about 30% in 2018 and higher in 2019. We believe continued strong industry conditions will support reported annual EBITDA of at least $8.5 billion, with realized iron ore prices an important variable. We project discretionary cash flow generation of $1.5 billion-$2.0 billion in 2018 after capital investment of $3.8 billion and working capital outflows of about $1.0 billion. Upside scenario Another upgrade would likely reflect further deleveraging and improvement in credit metrics. We could see a ratio of FFO to debt comfortably above 30% WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 4
throughout the cycle as commensurate with a higher rating. This would be consistent with FFO to debt approaching 45% in the current favorable market environment. In addition, we would expect clearly positive FOCF and improving EBITDA per tonne. Alternatively, over time, the continuing realization of the company's 2020 cash-requirement reduction plan could result in an upgrade if we observe sustainably stronger performance than peers and improved cash generation visibility, with less sensitivity to market conditions in China and elsewhere. Downside scenario Although unlikely in the next 12 months, we could lower the rating if we believed the company's adjusted FFO to debt was going to remain at or below the 25% minimum that we see as commensurate with the 'BBB-' rating at the bottom of the cycle, and if cash flows after investment and dividends turned negative. This could result from, for example, unanticipated material acquisitions and a reversal of prevailing supportive industry conditions before a significant reduction in debt. Ratings Score Snapshot Corporate credit rating: BBB-/Stable/A-3 Business risk: Satisfactory Country risk: Intermediate Industry risk: Moderately high Competitive position: Satisfactory Financial risk: Significant Cash flow/leverage: Significant Anchor: bb+ Modifiers Diversification/portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Strong (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Positive (+1 notch) Issue Ratings Capital structure The capital structure primarily consists of unsecured debt issued or guaranteed by ArcelorMittal. There is also a $1 billion U.S. asset-backed facility and a $5 billion trade receivable facility. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 5
Subordination risk analysis We rate the senior unsecured debt issued or guaranteed by ArcelorMittal at 'BBB-', in line with the corporate credit rating. Even if the senior unsecured debt ranks behind the debt issued by subsidiaries in the capital structure, we believe the risk of subordination would be mitigated by the material consolidated earnings that other ArcelorMittal subsidiaries generate. Related Criteria Criteria - Corporates - General: Reflecting Subordination Risk In Corporate Issue Ratings, Sept. 21, 2017 General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 General Criteria: Guarantee Criteria, Oct. 21, 2016 Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Criteria - Corporates - Industrials: Key Credit Factors For The Metals And Mining Downstream Industry, Dec. 20, 2013 Criteria - Corporates - Industrials: Key Credit Factors For The Metals And Mining Upstream Industry, Dec. 20, 2013 Criteria - Corporates - Industrials: Methodology For Standard & Poor's Metals And Mining Price Assumptions, Nov. 19, 2013 General Criteria: Methodology: Industry Risk, Nov. 19, 2013 General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 General Criteria: Group Rating Methodology, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Criteria - Insurance - General: Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Related Research Industry Top Trends 2018: Metals And Mining, Nov 13, 2017 Metals Retain Their Lustre: S&P Global Ratings Raises Metals Price Assumptions Again, Dec 07, 2017 The Top Five Rating Factors For Emerging Market Steelmakers, Jan. 30, 2018 Ratings List Upgraded; Outlook Action WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 6
To From ArcelorMittal Corporate Credit Rating BBB-/Stable/A-3 BB+/Positive/B Senior Unsecured BBB- BB+ Commercial Paper A-3 B ArcelorMittal USA LLC Corporate Credit Rating BBB-/Stable/-- BB+/Positive/-- ArcelorMittal Finance Corporate Credit Rating BBB-/Stable/-- BB+/Positive/-- Recovery Ratings Withdrawn To From ArcelorMittal Recovery Rating NR 3(65%) Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@spglobal.com Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 7
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