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Why ArcelorMittal Stock Dropped 17% Today

By Rich Smith - May 11, 2020 at 2:04PM

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Moody's downgrade prompts a dilutive share and debt offering.

What happened

European steelmaker ArcelorMittal (MT -2.95%) reported its Q1 2020 earnings results last Thursday. Although the company had a 23% decline in sales ($14.8 billion) and a net loss ($1.11 per share), investors reacted positively that day, bidding up Arcelor shares nearly 6%.

Today, Arcelor is giving back all those gains and more. Its stock was down 17.4% as of 1:20 p.m. EDT.

Glowing red stock chart arrow trending down

Image source: Getty Images.

So what

Why is Arcelor stock down so much? Two factors seem to be at play here. First, Moody's downgraded ArcelorMittal's senior unsecured debt to junk status (Ba1) on Friday. As Moody's analysts explained: "The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across ... the steel sector ... [and] the weaknesses in ArcelorMittal's credit profile, including its exposure to cyclical end-markets such as the automotive, machinery and construction industries have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions, and ArcelorMittal remains vulnerable to the outbreak continuing to spread."

Now what

Second, to address this risk, Arcelor announced this morning an offering of common shares and mandatorily convertible subordinated notes in an expected total of $2 billion.  

Details on the offerings appear to be in flux. Many of the spaces for inserting relevant information on the offerings in question, described in filings with the Securities and Exchange Commission today, remain blank. What is clear is that Arcelor intends to do two separate offerings (one selling shares of common stock, and the other for notes that convert into common stock after three years) in order to raise cash and shore up its balance sheet to improve its creditworthiness.  

Arcelor says these two offerings will help it deleverage and enhance liquidity, "thereby building additional resilience going forward in what remains an uncertain environment." Investors today may be more concerned that the size of the offerings (for new shares, and for debt converting into shares) will dilute their ownership stakes. They're selling ArcelorMittal stock today before that can happen.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Moody's. The Motley Fool has a disclosure policy.

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ArcelorMittal Stock Quote
$24.65 (-2.95%) $0.75
Moody's Corporation Stock Quote
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