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ArcelorMittal upgrade could be less likely on Essar Deal - Fitch
Steel News - Published on Sat, 03 Mar 2018
An upgrade of ArcelorMittal's (AM; BB+/Positive) rating could become less likely if the company's bid for insolvent Indian steel producer Essar Steel proceeds to an acquisition that leads to a rise in funds from operations (FFO) adjusted leverage, even though a transaction would moderately enhance AM's operating profile through it gaining a foothold in the growing Indian market, Fitch Ratings says.
The impact on AM's credit metrics would depend on the transaction amount and the structuring of the deal. If AM completes an acquisition with a partner, which we view as the most probable scenario, and/or structures the deal on a non-recourse basis, it may be leverage-neutral. But if AM bids alone and acquires Essar Steel on its balance sheet, FFO adjusted leverage would remain above our positive rating sensitivity of 3.0x over the rating horizon.
AM is competing with Numetal, a consortium of the Ruia family and Russian state-owned VTB bank. The Committee for Creditors to Essar Steel is evaluating bids and is set to announce the outcome by end-March 2018. Recent bids for distressed assets in India have been at a substantial haircut to book value of over 20%, which would point to a potential purchase price of USD6 billion-7 billion for Essar Steel.
AM has been deleveraging for several years, with FFO adjusted leverage declining from 7.4x at end-2015 to 2.9x at end-2017 through asset disposals, accelerated debt repayments and cost reduction, helped by improved steel market conditions including higher prices. The company has publicly outlined its commitment to reducing unadjusted net debt to USD6 billion and to sustaining investment-grade credit metrics over the rating horizon. The sale of non-core assets remains an option for the company to maintain this commitment in the event of acquiring Essar Steel.
Acquiring Essar Steel would moderately enhance AM's operating profile by giving it a foothold in the growing Indian market. Essar Steel is the fourth-largest steel company in India with nameplate capacity of about 10mtpa and EBITDA of about USD0.4 billion. The company is under an insolvency resolution process with total financial claims of nearly USD8 billion.
AM plans to use its turnaround expertise to resolve bottlenecks and improve the operating efficiency of Essar Steel's steelworks plant in Hazira. The competing bidder, Numetal, has recently signed a deal to acquire a controlling stake in the slurry pipeline that supplies about half of the iron ore to the plant.
Source : Strategic Research Institute