Our Experts Comment the Times Series

See All the Comments

On And On

07 October 2019 by jbchevrel

ArcelorMittal (MTNA) was the worst performing 5y CDS in Main s32 today, wider by +9bp to 195bp. 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. The #1 steel maker in the world by tonnage saw its outlook lowered to negative by S&P, from stable, the rating agency stated that “the combination of deteriorating conditions in the European steel market and two large acquisitions will weigh heavily on MTNA profitability and credit metrics in 2019.” They expect a very weak performance in 2019, with FFO/debt below 20% and will cut to BB+ if there are delays in the divestment programme, EBITDA below $7B or poor cash flow generation mean that “ArcelorMittal's adjusted FFO to debt remains well below 25% in 2020-2021.” This is half surprise, given the trajectory in MTNA credit metrics and as Q3 expectations are poor. Moody’s may also follow suit, as far as the outlook is concerned. For now, it seems perceived more like a warning than heralding an imminent downgrade. Late September the sentiment on the name had been supported by the news that MTNA is evaluating a potential sale of some of its iron ore operations in Canada (main part -- worth about $2B), 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. Beyond the potential proceeds from the 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. Given how Markit rules for relevant rating in Europe (lowest of the ‘lowests’), if nothing changes on the S&P side, we may well see the widest name in Main s32 exit the Main after its 3rd consecutive series and go back to XOver in s33.