Roll up, roll up

ArcelorMittal strikes while market is hot

ArcelorMittal, the world’s biggest steelmaker, is tackling debts by selling $3.5 billion of new shares and convertible bonds. This is easier than a rights issue and the company sensibly waited for warmer market sentiment before jumping in. But the latest capital call will once again eat into the stake of the controlling Mittal family.

At first, and somewhat paradoxically, a fall to “junk” status last year seemed to remove the need for a capital-raising at the indebted metals giant. With no investment-grade rating to defend, the logic went, the pressure to shore up the balance sheet lessened. In reality, it seems Chairman and Chief Executive Lakshmi Mittal, and son Aditya Mittal, the chief financial officer, were merely wearing their best poker faces.

That bought them time to wait for better conditions. And the markets smiled on them. From November 5, the day before a crucial Moody’s downgrade, to January 8, ArcelorMittal’s Dutch-listed shares rose 13 per cent. The general appetite for risk has grown too: spreads on the iTraxx Crossover CDS index, for example, narrowed 18 per cent. That is very helpful if you are selling instruments that blend a six-per cent-odd yield and equity upside, as the three-year mandatory convertibles being sold here do.

The deal reprises a 2009 capital-raising, which also used convertibles to avoid the prolonged headache of holding a rights issue. But this again tests the deepness of the Mittals’ pockets. They will contribute $600 million — or 17 per cent of the total new capital. That is way short of their existing stake of 41 per cent. The ultimate result depends on the final combination of capital raised, and how the Mittals’ contribution is spent. But their holding might drop to about 38 per cent.

Still, the capital call makes sense. Along with asset sales, it will help cut net debt to $17 billion by mid-2013, a $5 billion reduction in six months. That burden now looks more manageable when set against Ebitdaof $7 billion. Agencies are unlikely to grant ArcelorMittal a quick return from “junk”. Betting on a steel-market recovery won’t be for all investors. But with the strength now added to the balance sheet, some who have shunned the stock might now steel themselves to take a fresh look.