Please ensure Javascript is enabled for purposes of website accessibility

Why ArcelorMittal Stock Dropped 17% Today

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

ArcelorMittal Stock Quote
ArcelorMittal
MT
$24.65 (-2.95%) $0.75
Moody's Corporation Stock Quote
Moody's Corporation
MCO
$322.30 (-0.21%) $0.67

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.