ArcelorMittal burns hybrid bridges with shock redemption

4 min read

The US$650m deal closed on Monday at 108.62, according to Tradeweb, but fell to 101 on the bid, matching the call price, when news of the redemption was announced.

The move casts a new light on the risks associated with subordinated debt, and shows just how hybrid buyers can find themselves at issuers’ mercy.

“It’s another case of having not really factored in all the possible options,” one London-based investor said.

“It’s obviously a massive shame that we’ve fallen victim to the product yet again, but you can’t blame the issuer for making the most of the clauses and options available to them.”

Arcelor’s move, bankers said, was prompted by Moody’s last July publishing new guidelines which meant hybrids from junk rated issuers would no longer qualify for equity credit.

The agency argued that sub-investment grade companies are materially closer to default, have shorter dated and more complex capital structures, and carry debt with more covenants.

ArcelorMittal is rated Ba1/BB+/BB+, having been downgraded by Moody’s in November 2012. The company was said to have been considering its options since Moody’s made its changes, which effectively turned its hybrids into very expensive debt overnight.

The hybrid being redeemed was launched in September 2012 and pays a coupon of 8.75%.

Not the first

ArcelorMittal is not the first to call bonds in response to rating agency changes, but unlike other issuers, the steelmaker has not offered an olive branch to investors.

In June last year, Danish oil and gas company Dong said it would buy its existing hybrids back at 104 - around six points lower than where they were trading - in response to a methodology change by Standard & Poor’s.

Bondholders were naturally aggrieved by the offer, but consoled to an extent by the fact that Dong could have called them at an even lower price of 101.

More recently, in November last year, Alliander tendered its hybrids at 102.5, around a point and a half below the trading price of 104, but similarly above the 101 it was entitled to pay under the deal’s documentation.

Burning bridges

One credit strategist said that unlike Dong and Alliander, ArcelorMittal was likely less scared of “burning its hybrid bridges” because it is unlikely to want to tap the hybrid market again in the near future.

Strategists at ING implied the same.

“Assuming there is no further announcement the implication from this is that the company does not see itself as needing to access the corporate hybrid market in the medium term,” they wrote in a note.

Several investors, all speaking off the record, backed up this, and said they would not consider buying hybrid bonds issued by ArcelorMittal in the future, unless there were plenty of investor-friendly covenants.

“Today just shows the extent to which the hybrid bond market can still be a minefield,” one said.

“It’s not the first time I’ve been burned by buying this product, but hopefully it’s the last.”

Telecom Italia next?

Following Arcelor’s action, several market participants expressed concerns that Telecom Italia could be next to call its existing hybrid paper.

Its hybrids issued in March 2013 dropped 1.5 points in cash terms to around 102.5, according to Tradeweb on Tuesday.

Like ArcelorMittal, Telecom Italia was dealt a blow following Moody’s hybrid goal post changes, when it was downgraded to sub-investment grade status in October.

At the time, strategists said that ArcelorMittal could be next in the firing line.

The redemption period lasts until February 20. Citibank has been mandated as fiscal agent, paying agent and agent bank.

ArcelorMittal steel workers wait outside the company's regional headquarters in Flemalle