ArcelorMittal Outlook Revised To Stable On Likely Strong Recovery In 2021; 'BBB-/A-3' Ratings Affirmed
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Research Update:
ArcelorMittal Outlook Revised To Stable On Likely
Strong Recovery In 2021; 'BBB-/A-3' Ratings
Affirmed
February 11, 2021
Rating Action Overview
PRIMARY CREDIT ANALYST
- After difficult industry conditions in 2019 and the first nine months of 2020, ArcelorMittal Ivan Tiutiunnikov
recovered strongly in the fourth quarter of 2020 on the back of supportive demand for steel. London
+ 44 20 7176 3922
- We project underlying EBITDA for ArcelorMittal of more than $10 billion in 2021, and forecast
ivan.tiutiunnikov
that the company will restore its credit metrics earlier than we expected, and more importantly, @spglobal.com
build headroom under the current long-term rating.
SECONDARY CONTACT
- We view the change that ArcelorMittal has announced to its financial policy, including a new Elad Jelasko, CPA
dividend policy, as supportive of the current rating. London
+ 44 20 7176 7013
- We are therefore revising our outlook on ArcelorMittal to stable from negative and affirming our
elad.jelasko
'BBB-/A-3' long- and short-term issuer credit ratings on the company and our 'BBB-' issue @spglobal.com
ratings on its debt instruments.
- The stable outlook reflects our view of ArcelorMittal's ability to maintain ample rating
headroom through the industry cycle and accommodate business growth, supported by its
financial policy.
Rating Action Rationale
Supportive industry conditions will help ArcelorMittal restore rating headroom in 2021. On
Feb. 11, 2021, ArcelorMittal reported strong underlying EBITDA of $1.7 billion for the fourth
quarter of 2020. This results in full-year EBITDA of about $4.3 billion, which exceeds our
expectation of $3.5 billion-$4 billion. The strong results in the last quarter of 2020 were thanks to
significant growth in the demand for steel and a high price for iron ore. We understand that the
industry started 2021 strongly, with full order books for the coming months across the different
regions, translating into higher steel prices. In addition, the company will enjoy healthy iron ore
prices peaking above $170 per ton. We project underlying EBITDA of more than $6 billion for
ArcelorMittal in the first half of 2021, and about $10 billion-$11 billion in the full year, compared
www.spglobal.com/ratingsdirect February 11, 2021 1Research Update: ArcelorMittal Outlook Revised To Stable On Likely Strong Recovery In 2021; 'BBB-/A-3' Ratings Affirmed with our previous assumption of $6 billion-$6.5 billion in October 2020. This will likely translate into funds from operations (FFO) to debt of close to 50% in 2021, considerably higher than our threshold for the rating of comfortably above 25% during mid-cycle conditions. ArcelorMittal's new financial policy provides clarity on its uses of cash and keeps net debt under control. The company's net debt position was $6.4 billion as of Dec. 31, 2021, below its target of $7.0 billion. With strong results so far in 2021, we project that ArcelorMittal could achieve free operating cash flow (FOCF) of about $2 billion-$2.8 billion in the full year. After meeting all its financial objectives, including safeguarding the investment-grade rating, ArcelorMittal has addressed the last pillar of its financial policy, capital allocation. The company will pay a progressively increasing base dividend of about $0.3 per share (about $300 million). Additional distributions will be limited to 50% of free cash flow after the payment of the base dividend, subject to net debt to EBITDA remaining below 1.5x. Under our base case for 2021, we expect the company to return about $2 billion to its shareholders--including the proceeds from a sale of shares in Cleveland-Cliffs--through dividends and share buybacks. Low debt and positive free cash flow during the cycle remove potential negative pressure on the rating. We estimate that under mid-cycle conditions, with underlying EBITDA of $7 billion and reported net debt of $7 billion, the company would have S&P Global Ratings-adjusted FFO to debt of slightly above 30%, compared to our 25% minimum threshold for the current rating. A drop to the 25% threshold would require underlying EBITDA to fall to about $5 billion, and even in such a scenario, the company would likely generate positive free cash flow, excluding potential working capital inflows. During the challenging industry conditions of 2020, the company's underlying EBITDA was $4.3 billion. Outlook The stable outlook reflects ArcelorMittal's ability to maintain ample rating headroom through the cycle and accommodate business growth, supported by its financial policy. Under our base-case scenario, we expect ArcelorMittal to post adjusted EBITDA of $10.5 billion-$11.5 billion in 2021, equivalent to underlying EBITDA of $10 billion-$11 billion. This translates into positive free cash flow and adjusted FFO to debt of about 48%-53%. We continue to view adjusted FFO to debt of comfortably above 25% during normal market conditions, and about 25% at the bottom of the cycle, as commensurate with the current long-term rating. Downside scenario With the ongoing recovery in the market and ArcelorMittal meeting its reported net debt target, we view a negative rating action as remote. However, a downgrade could occur if: - We revise our assessment of ArcelorMittal's business risk profile downward. This could be possible if we continue to see significant volatility in ArcelorMittal's EBITDA despite the ongoing cost-cutting program. Specifically, we could revise the company's business risk profile downward if its underlying EBITDA declined below $5 billion, even at the bottom of the cycle, and was generally more volatile than that of its peers in the sector. - ArcelorMittal deviates from its financial policy, leading to adjusted FFO to debt declining below 25% at the bottom of the cycle, without a clear prospect of recovery in the following years. www.spglobal.com/ratingsdirect February 11, 2021 2
Research Update: ArcelorMittal Outlook Revised To Stable On Likely Strong Recovery In 2021; 'BBB-/A-3' Ratings Affirmed Upside scenario We view rating upside as unlikely in the coming 12 months. A higher rating would be subject to ArcelorMittal developing a track record under its revised financial policy, as well as meeting the following conditions: - A reduction in the volatility of its profitability. This would be the case if the company's EBITDA fell no more than 30% during industry downturns compared with its multi-year average. In our view, the company's ongoing cost-cutting program, and its focus on expanding in the growing markets of Mexico, India, and Brazil, may improve the resilience of the business over time. - An improvement in credit metrics, with adjusted FFO to debt approaching 45% during normal industry conditions and no less than 30% at the bottom of the cycle. Although it is not our base case, the company's FFO to debt might approach 45% under normal industry conditions from 2022, although its ability to maintain 30% at the bottom of cycle is less clear. Company Description ArcelorMittal is one of the world's largest steel producers, with crude steel production of about 71.5 million tons (Mt) in 2020, representing a global market share of about 4%. The steelmaking operations are spread across 17 countries on four continents; three-quarters are integrated steelmaking facilities and the rest are mini-mill facilities. ArcelorMittal's main business segments are split geographically between Europe, North America, Brazil, South Africa, Kazakhstan, and Ukraine (ACIS). In addition, ArcelorMittal is a sizable iron ore producer, with production of about 58 Mt in 2020, supplying its own steel operations and selling externally. The group also engages in steel distribution. The company is owned by the Mittal Family (35.6%), with Lakshmi Mittal acting as executive chairman, and his son, Aditya Mittal, as CEO. Our Base-Case Scenario Assumptions - Positive EBITDA and FOCF contributions from AM/NS India, a joint venture between ArcelorMittal and Nippon Steel, which will be reinvested in the operations. - Working capital outflows of about $3 billion in 2021, amid a strong market recovery from a low base and an increase in the cost of raw materials. - Dividend distributions in line with the new dividend policy. The policy specifies a base of about $300 million of dividends, with discretionary dividends of 50% of free cash flow, while net debt to EBITDA is below 1.5x. - No contribution from the recently announced $1 billion cost-cutting program. - No material mergers or acquisitions. - About $0.7 billion of cash from the sale of 40 million shares in Cleveland-Cliffs in 2021, which will be returned in full to the shareholders. www.spglobal.com/ratingsdirect February 11, 2021 3
Research Update: ArcelorMittal Outlook Revised To Stable On Likely Strong Recovery In 2021; 'BBB-/A-3' Ratings Affirmed
Key metrics
ArcelorMittal--Key Metrics
--Fiscal year ended Dec. 31--
2019a 2020e 2021f 2022f
(Mil. $)
Eurozone GDP growth (%) 1.3 (7.2) 4.8 3.9
U.S. GDP growth (%) 2.2 (3.9) 4.2 3.0
Eurozone steel demand growth (%) (6.0) (15.0) 11.0 4.0
U.S. steel demand growth (%) (2.0) (16.0) 7.0 3.0
Iron ore price (US$/ton) 88.0 103.0 115.0 85.0
Underlying EBITDA 5.1 4.3 10.0-11.0 7.0-8.0
Adjusted EBITDA 4.9 3.9 10.5-11.5 7.5-8.5
Capex 3.6 2.4 2.7-2.9 2.7-2.9
FOCF 2.9 1.6 2.0-2.8 2.4-3.2
Dividends and share buybacks* 0.4 0.5 About 2.0 1.3-1.7
Reported net debt 9.3 6.4 5.4-6.0 About 7.0
Adjusted debt 26.8 18.7 17.4-18.0 About 19.0
Adjusted debt to EBITDA (x) 5.5 4.8 1.5-1.7 2.2-2.5
Adjusted FFO to debt (%) 13.5 About 15.0 48.0-53.0 33.0-38.0
*Excluding dividends to minorities. FFO--Funds from operations. FOCF--Free operating cash flow. Capex--Capital expenditure. a--Actual.
e--Estimate. f--Forecast.
Liquidity
We assess ArcelorMittal's liquidity as strong, owing to its limited short-term debt maturities,
committed credit lines, and positive FOCF. We estimate the ratio of liquidity sources to uses at
above 1.5x for the 12 months from Jan. 1, 2020, as well as the subsequent 12 months. We also
factor in our view of ArcelorMittal's generally prudent risk management, including liability
management, and proven access to bank funding and capital markets. We project that the
company should be able to maintain significant headroom under the covenants on its
medium-term bank facilities.
Principal liquidity sources for the 12 months from Jan. 1, 2021, include:
- $6 billion of cash;
- $5.5 billion available under medium-term committed bank facilities that expire in December
2025;
- $7.7 billion-$8.5 billion of FFO after lease payments; and
- $0.7 billion of proceeds from the sale of shares in Cleveland-Cliffs.
Principal liquidity uses for the same period include:
www.spglobal.com/ratingsdirect February 11, 2021 4Research Update: ArcelorMittal Outlook Revised To Stable On Likely Strong Recovery In 2021; 'BBB-/A-3' Ratings Affirmed - $2.5 billion of short-term debt maturities; - $2.7 billion-$2.9 billion of capex; - $2 billion or so of distributions to shareholders; and - Significant working capital requirement amid a strong rebound in industry conditions, as well as intra-year swings. Issue Ratings - Subordination Risk Analysis Capital structure The capital structure primarily consists of unsecured debt issued or guaranteed by ArcelorMittal. There is also a $5.5 billion revolving credit facility. Analytical conclusions We rate the senior unsecured debt issued or guaranteed by ArcelorMittal 'BBB-', in line with the issuer 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 generated by other ArcelorMittal subsidiaries. Ratings Score Snapshot Issuer 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) www.spglobal.com/ratingsdirect February 11, 2021 5
Research Update: ArcelorMittal Outlook Revised To Stable On Likely Strong Recovery In 2021; 'BBB-/A-3' Ratings Affirmed
Related Criteria
- General Criteria: Group Rating Methodology, July 1, 2019
- General Criteria: Hybrid Capital: Methodology And Assumptions, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March
28, 2018
- 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 | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate
Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Ratings List
Ratings Affirmed; Outlook Action
To From
ArcelorMittal
Issuer Credit Rating BBB-/Stable/A-3 BBB-/Negative/A-3
Senior Unsecured BBB-
Commercial Paper A-3
ArcelorMittal Finance
Issuer Credit Rating BBB-/Stable/-- BBB-/Negative/--
Not Rated Action
To From
ArcelorMittal USA LLC
Issuer Credit Rating NR/-- BBB-/Negative/--
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. A description of each of
S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at
https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings
information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating
action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search
www.spglobal.com/ratingsdirect February 11, 2021 6Research Update: ArcelorMittal Outlook Revised To Stable On Likely Strong Recovery In 2021; 'BBB-/A-3' Ratings Affirmed 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.spglobal.com/ratingsdirect February 11, 2021 7
Research Update: ArcelorMittal Outlook Revised To Stable On Likely Strong Recovery In 2021; 'BBB-/A-3' Ratings Affirmed
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