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Why ArcelorMittal’s Debt Reduction Plan Is a Bitter Pill

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ArcelorMittal’s debt reduction plan

One of the key takeaways from ArcelorMittal’s 4Q15 financial results was the announcement of its new debt reduction measures. ArcelorMittal expects to lower its net debt by $4 billion this year. This will bring the company’s net debt below $12 billion from its current ~$16 billion.

ArcelorMittal will receive almost $1 billion by selling its 35% holding in Gestamp. Furthermore, the company is looking at raising $3 billion by way of a rights issue. Both these transactions are expected to be completed by the end of 1H16.

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A necessity

The capital issue and stake sale are necessities for ArcelorMittal. The company faces significant near-term debt maturities. ArcelorMittal has debt repayments in excess of $2 billion each year until 2019, as can be seen in the graph above. Now, there are four ways by which the company can repay this debt:

  • New debt issuance: However, according to a Bloomberg report citing money managers, MT “has been locked out of credit markets.” The report cites high yield on MT’s outstanding debt as the reason for this. Apparently, Nucor (NUE) is the only steel company to carry an investment grade (BND) credit rating.
  • Internal accruals: Looking at the operating environment, it will be difficult for MT to repay its debt with internal accruals. It’s important to note that while U.S. Steel Corporation (X) and ArcelorMittal are struggling with their free cash flows, Nucor and Steel Dynamics (STLD) generated decent cash flows last year.
  • Raising of equity
  • Asset sales

Only options

As the first two options were highly improbable, MT was left with asset sales and raising fresh equity to address its leverage ratios. Raising equity at such depressed stock prices will lead to an earnings dilution of almost 50%, looking at MT’s current market capitalization.

Though equity issuance will lead to significant earnings dilution, it’s a bitter pill that investors will have to swallow. Right now, the biggest investor concern is short-term survival, something that the equity issuance can help.

Meanwhile, looking at the challenging markets, ArcelorMittal has announced a series of measures under its Action 2020 plan. We’ll discuss more about this plan in the next part of the series.

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