27 September 2019 by jbchevrel
ArcelorMittal (MTNA) is the world’s leading integrated steel and mining company, indeed the #1 steel maker based on tonnage, producing not far from a 100m mt/year. The name is currently rated Baa3/BBB- and is also the #1 widest name in iTraxx Main s32, which it joined in series 30 from XOver. MTNA was the #1 best performing single name CDS in Main s32 today (5y CDS was tighter -5bp to roughly 170bp) until it was reported that the White House is weighing some curbs on U.S. investments in China, with discussions including blocking all U.S. investment in Chinese companies... Although nothing has seemingly been decided and there is no timeline, it was enough to tame the earlier tightening of global growth-sensitive mining sector, including MTNA, GLENLN and AALLN in the Main. The rationale behind restricting investments in Chinese entities is said to be to protect U.S. investors from excessive risk due to lack of regulatory supervision, while it just looks like one more front in the trade+ (trade, currency, technology, intellectual property, etc) war. The earlier outperformance of MTNA (-5) in a context where Main s32 fair value is little moved (-0.36), was due to the news that MTNA is evaluating a potential sale of some of its iron ore operations in Canada, Brazil and Liberia in order to raise cash, which would be explicitly targeted to reduce debt. As of the end of Q2, they had a gross debt $13.8B and a net debt of $10.2B. The big chunk of the potential asset disposal proceeds seem to come from the Canadian assets as those are, according to the Bloomberg piece, worth about $2B. Additionally, MTNA is reported to be exploring a sale of a downstream construction business. MTNA has not started the formal sale process, so nothing has been written in the marble so far, and they can still end up deciding not to sale those operations, but it confirms the management’s commitment to reduce leverage. Beyond the hypothetical proceeds from the potential sale, there could also be a mitigating negative second-order effect to it. Indeed, as things stand, MTNA self-supplies almost 50% of its own iron ore needs, which significantly balances its risk profile. So in the medium term, reducing that source of diversification could be seen slightly negatively by investors and rating agencies. In Q2 they had booked an operating loss of -$0.2B (H1 +$0.6B) incl. impairments (esp. on MTNA USA fixed assets after sharp decline in steel prices and high raw material costs) and EBITDA had come $1.6B in Q2 and $3.2B in H1 i.e. -43%y lower reflecting the negative price-cost effect which last Friday’s Grapple was focusing on (US Steel Corp - X).