Fitch Ratings has upgraded ArcelorMittal S.A.’s (AM) Long-Term Issuer Default Rating (LT IDR) and senior unsecured rating to ‘BBB-‘ from ‘BB+’. The Outlook on the LT IDR is Stable. A full list of rating actions is provided below.
The rating upgrade reflects AM’s improved financial profile driven by material absolute debt reduction. The company used cash flow generated during the current cyclical peak in a balanced approach to strengthen its balance sheet, as well as to fund investments and shareholder returns. Rebasing debt at lower levels, together with a streamlined asset base, completion of strategic growth projects and cost-optimisation measures, will support its credit metrics through the cycle.
We expect AM’s funds from operations (FFO) gross leverage to remain at around 2.5x in normalised market conditions post-2022, commensurate with an investment-grade rating. AM’s net debt has been below the company’s maximum target of USD7 billion since 2020 and we expect it to remain comfortably below this level, underpinned by the company’s financial policy.
KEY RATING DRIVERS
Record 2021 Earnings: A V-shaped post-pandemic recovery in steel demand, shortages in the value chain, along with strong steel spreads resulted in an all-time high EBITDA of USD8.3 billion in 1H21 as reported by the company. For 2021 we forecast AM’s EBITDA of around USD18.7 billion, based on our expectations that high steel prices will be sustained throughout most of 2H21, supported by a robust orderbook and healthy spreads. We expect that steel prices will gradually normalise thereafter, which is already visible in Europe, resulting in a reduction of EBITDA towards USD8.5 billion in 2022. We project a through-the-cycle EBITDA of around USD6.8 billion.
Investment-Grade Credit Metrics: AM used a large part of cash flow generated during record steel market conditions to reduce gross debt. In 1H21 it repaid more than USD3 billion debt and we expect a total of around USD4 billion debt repayment in 2021. We also expect AM to use excess cash to meet upcoming debt maturities in 2022. As a result, we project FFO gross leverage at 1.1x at end-2021 and to normalise on average at around 2.5x in 2022-2024. AM’s reduced debt load will mitigate the impact of earnings volatility during the economic cycle and we therefore expect AM’s leverage to be commensurate with an IG rating.
Balanced Financial Policy: We expect AM to continue with its balanced approach to cash flow deployment. For 2021, we expect it to generate enough cash to fund around USD4 billion of debt repayment, USD3.2 billion capex and return USD4.5 billion to shareholders. We assume that AM will continue its progressive dividend policy and distribute 50% of excess free cash flow (FCF) to shareholders as net debt/EBITDA remains below 1.5x. We forecast net debt to remain at a conservative level, well below AM’s target of USD7 billion. We also expect management to remain compliant with its financial policy in case of a potential large acquisition, which is not part of our rating case.
Organic Growth in Focus: Sale of its US assets and deconsolidation of Ilva streamlined AM’s asset portfolio and allow more focused investments in strategic projects. Key investment projects with a total budget of USD1.5 billion include investments in steel facilities in Brazil, Mexico and Canada and recommencement of expansion in Liberia that will add 10 million tonnes (mt) of iron ore production by 2024. Management estimate that these projects will add USD600 million EBITDA by 2024.
Above-Average Cost Position: CRU estimates that AM’s lowest-cost operations in Ukraine and Brazil sit in the first quartile, and higher-cost operations in Europe and NAFTA in the second to fourth quartile of the global steel cost curve, but are on a par with regional averages. AM aims to achieve permanent fixed-cost reductions by closing less efficient facilities, reducing overheads, insourcing of the repair function and increasing productivity. These measures are expected to reduce costs by USD1 billion in total by 2022.
Decarbonisation Targets Increase Capex: AM has introduced a new group-wide ambitious target to reduce carbon dioxide emissions by 25% by 2030 (based on Scope 1 and 2) versus 2018, and targets to accelerate reduction in its carbon footprint in Europe to 35% by 2030. Its decarbonisation plans require USD10 billion capex, out of which USD3.5 billion is to be invested before 2025. Management expects that around half of this capex will be government-funded. Fitch now expects capex to increase to around EUR4 billion a year from 2022. Despite large capex, we expect AM to generate FCF in 2021-2024.
Significant Decarbonisation Cost: AM is focusing on two main approaches: switching blast furnaces to DRI-EAF facilities, which use green hydrogen instead of fossil fuels, and smart-carbon and carbon capture and storage technology. The cost to achieve net zero emission by 2050 is significant and as such, the level of government decarbonisation funding, strength of economic growth and technological advancements will be key determinants.
Capturing Growth Potential in India: AM’s JV in India, AMNS India, continues its strong recovery. It had a 1H21 annualised EBITDA of around USD2 billion, and gross debt to EBITDA of around 2.6x with no debt maturities in the next four years. AM guarantees USD3.1 billion of AMNS’s debt, which we add to AM’s adjusted indebtedness. The JV is self-reliant and reinvests internally generated cash flow to streamline business operations and fund growth plans of around USD2.6 billion over the next five years.
Significant Scale and Diversification: AM’s rating reflects the company’s large scale as the world’s second-largest steel producer with a leading market share in its key regions. It also reflects its position as the world’s most diversified steel producer by product type, industrial application and geography, its significant share of high value-added products, and vertical integration into iron ore.
DERIVATION SUMMARY
AM is the second-largest global steel producer with 71.5mt of output in 2020 and ranks behind only China Baowu Steel Group Corporation Limited (A/Stable; ‘bbb’ Standalone Credit Profile), which has become the largest producer through a series of consolidations. AM is the largest steel producer in Europe, accounting for around 20% of the market, has over a 30% market share in Brazil, over 50% each in Canada and Africa and is the fifth-largest steel producer in the CIS. It is also exposed to developing Indian, Chinese and US markets via JVs.
AM’s peers include China Baowu Steel Group Corporation Limited, Gerdau S.A. (BBB-/Stable), PAO Severstal (BBB/Stable), PJSC Novolipetsk Steel (NLMK; BBB/Stable), PJSC Magnitogorsk Iron & Steel Works (MMK; BBB/Stable) and EVRAZ plc (BB+/Positive).
Baowu’s rating is supported by substantial operating scale, strong profitability, low-cost operations, cash flow generation, an adequate financial structure and state support. The rating also takes into account its lack of raw material self-sufficiency and lower diversification. Similarly to AM, Baowu is largely exposed to the automotive sector with AM being the largest steel supplier to automotive with around a 17% global market share while Baowu ranks third.
Gerdau is smaller in scale than AM. It is geographically diversified across the Americas and its EAF mini-mills-based profile provides high operating flexibility. The ability to source scrap, largely internally, allows it to lock in stable margins between scrap and steel prices. Gerdau, like ArcelorMittal Brazil, has a leading position on the Brazilian steel market. Gerdau’s leverage profile compares well with that of AM with FFO gross leverage for both companies expected at around 2.5x in the next three years.
Russian peers PAO Severstal, NLMK and MMK are less geographically diversified, with the sales of Severstal and MMK focused on the domestic market (60%-70% share of domestic sales), while NLMK’s sales are spread across Russia, Europe and partly the US. AM has a higher value-added and more sophisticated product mix than the Russian companies. The three Russian peers sit in the first quartile of the global steel cost curve due to higher raw-material integration, domestic-currency weakness against the US dollar and lower energy costs. Their leverage profiles are some of the strongest in the steel industry, supported by conservative financial targets, with FFO gross leverage below 1.5x
KEY ASSUMPTIONS
– Iron ore and coking coal prices in line with Fitch’s commodity price assumptions. Iron ore: USD160/t in 2021, USD100/t in 2022, USD80/t in 2023 and USD70/t afterwards. Coking coal: USD130/t in 2021, USD135/t in 2022, USD140/t in 2023 and thereafter;
– Mid-single-digit decline in steel shipments in 2021, due to the sale of US assets and deconsolidation of Ilva, followed by low single-digit growth until 2024;
– EBITDA margin in the steel segment to retreat from the peak of 2021 towards a normalised level;
– Working-capital accumulation in 2021 and partial reversal in 2022;
– Capex of around USD3.2 billion in 2021, increasing to around USD4 billion a year in the following three years; and
– Progressive increase in dividend and half of FCF (AM’s definition) to be used for share buybacks as projected net debt/EBITDA remains within its target.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– FFO gross and net leverage sustainably below 2.0x and 1.5x, respectively
– EBITDA margin above 15% on a sustained basis, driven by a supportive price environment, improvements in product mix and lower costs
– FCF (post dividends) margin above 3% on a sustained basis
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– FFO gross and net leverage sustained above 3.0x and 2.5x, due to, for example, deviation from the stated financial policy, and/or large debt-funded M&As.
– EBITDA margin below 10% on a sustained basis
– Persistently negative FCF (post-dividend and other shareholder distributions)
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Ample Liquidity: As of end-June 2021, AM had USD9.6 billion of liquidity, including around USD4.1 billion of readily available cash and USD5.5 billion of fully available long-term committed revolving credit facilities (RCFs) that mature at end-2025 (apart from USD100 million that matures at end-2023). This compares with about USD2.5 billion of short-term debt maturities.
Liquidity is also supported by AM’s EUR1.5 billion commercial paper programme (EUR679 billion outstanding at end-June 2021) and solid capital-market access. Fitch also forecasts that AM will generate positive post-dividend FCF in the next four years.
ISSUER PROFILE
AM is leading vertically integrated steel and mining producer with 71.5mt crude steel output. It has steel-making operations in 18 countries across four continents, including 37 integrated and mini-mills steel-making facilities.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch reclassified leases as other liabilities, reducing reported balance-sheet debt by about USD815 million at end-2020. Furthermore, Fitch has reclassified USD212 million of depreciation of right- of-use assets and USD66 million of interest on lease liabilities as lease expenses, reducing Fitch-defined EBITDA by USD278 million in 2020
USD1 billion mandatory convertible bonds reclassified as debt instead of non-controlling interest and other liabilities reported in the financial statements
Fitch assigned 50% equity credit to USD1 billion of mandatory convertible subordinated notes
Fitch adjusted balance-sheet debt as at end-2020 by including the utilised amount of the true sale of receivables programme of about USD3.8 billion
Fitch adjusted 2020 EBITDA by non-recurring impairment charges of USD211 million
Fitch added debt of third parties and AM’s joint ventures (excluding Calvert JV and counter guarantee from Prime Shipping Investments Limited) guaranteed by AM of USD4.2 billion to AM’s debt at end-2020
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
Corporate Hybrids Treatment and Notching Criteria (pub. 12 Nov 2020)
Corporate Rating Criteria (pub. 21 Dec 2020) (including rating assumption sensitivity)
Corporates Recovery Ratings and Instrument Ratings Criteria (pub. 09 Apr 2021) (including rating assumption sensitivity)
Sector Navigators – Addendum to the Corporate Rating Criteria (pub. 30 Apr 2021)
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)
ADDITIONAL DISCLOSURES
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
ENDORSEMENT STATUS
ArcelorMittal S.A. EU Issued, UK Endorsed
Source: Fitch Ratings