ArcelorMittal has staged one strategic retreat, but more battles lie ahead. Oddly, the stock market took the fast fall to "junk" of the world's biggest steel maker, with $34-billion (U.S.) of gross debt, as a non-event. But Tuesday's downgrade by Moody's only underscores the operational and financial challenges the company still faces.
Moody's demotion, following an August cut from Standard & Poor's, means the Luxembourg-based metals giant is now officially sub-investment grade. It joins such other European former blue chips as Nokia and Peugeot.
Credit markets reacted with understandable revulsion, but from a shareholder's perspective, the immediate financial fallout is limited. ArcelorMittal has estimated the first junk designation would increase annual borrowing costs by about $100-million, and a second by $50-million more. These are small headaches for a company of this size.
In fact, ArcelorMittal shares even enjoyed a perverse rally following the Moody's announcement. That's probably because the downgrade removed one risk: that the Mittal family, which runs the company and owns 41 per cent of the stock, would move proactively to bolster investment-grade ratings with a huge rights issue.
The risk was already receding. During the course of 2012, the company had moved from describing an investment grade as a "stated objective" to important but not "imperative." And, now that junk cannot be avoided, the equity thinking goes, the company should also feel less pressure to divest good assets cheaply.
Nonetheless, life remains grim. Moody's moved three months earlier than expected after ArcelorMittal turned in a dismal third quarter, and expects the operating environment to get worse still. And loan covenants look tight: ArcelorMittal's net debt spiked to 3.1 times trailing EBITDA at end-September, against a limit of 3.5 times.
If ArcelorMittal's markets have indeed bottomed and are due a rebound, the next stage should be balance-sheet repair at a measured pace. But if there's another nasty lurch downwards, a cash call may yet be needed – but for reasons of necessity, not to safeguard debt-market prestige. That would certainly be more painful than having tapped the market earlier from comparative strength.