UPDATE 2-ArcelorMittal to issue $3.5 bln stock, notes to cut debt
* Plans $3.5 bln issue of shares, convertible notes
* Aims to cut net debt to $17 bln by mid-2013
* Firm's credit at junk rating with S&P, Moody's, Fitch
* Notes to have 3-year maturity, coupon 5.875 to 6.375 pct
* Shares drop by around 5 pct after announcement
(Updates shares, adds analyst comment, background)
BRUSSELS, Jan 9 (Reuters) - ArcelorMittal, the world's largest steelmaker, will issue $3.5 billion of shares and convertible notes to sharply reduce a heavy debt level that has led to a cut in its credit rating to junk status.
The company said on Wednesday the issue, the exact make-up of which has yet to be determined, would help to reduce its net debt to about $17 billion by the end of June, from an expected $22 billion at the end of 2012.
ArcelorMittal shares, barely changed before the announcement, fell 4 percent to 12.75 euros by 1415 GMT, making them the weakest in the FTSEurofirst 300 index of leading European stocks.
Chairman and Chief Executive Lakshmi Mittal said the new issue, along with asset disposals, a planned reduction in dividends and cost savings would bring forward the achievement of a medium-term debt target of $15 billion.
Analyst Maarten Bakker of ABN Amro in Amsterdam said the combination of measures should ensure ArcelorMittal reached this target.
"It looks to be enough to me, $15 billion net debt seems even on the conservative side on the longer-term view, but it seems an appropriate measure in my view, given the fact that the market has declined structurally in Europe," he said.
Seth Rosenfeld, analyst at Jefferies in London, said the move was painful in the short term, but should help ArcelorMittal put the debt problem behind it this year.
He added the share sell-off was to be expected, but was not dramatic, given a 16 percent recovery from late November until Tuesday, with investors now locking in gains.
"Many investors seem to recognise that much of the positive sentiment behind the steel sector as a whole is gradually fading as iron ore prices have likely topped out and steel price increases may decelerate moving through the first quarter," he said.
ArcelorMittal said the mandatory convertible subordinated notes would have a maturity of three years and pay a coupon in the range of 5.875 to 6.375 percent.
The Mittal family intends to pump $600 million into the new shares and notes.
The group, formed in 2006 when Mittal's steel business bought European peer Arcelor, last month wrote down the value of its European business by $4.3 billion following an 8 percent slump in European demand in 2012 and no sign of a quick recovery.
The $500 billion-a-year steel industry, a gauge of the global economy, slowed sharply last year as a slowdown in China combined with weak demand from Europe.
Austerity drives aimed at tackling the euro zone sovereign debt crisis have cut demand for cars and construction - steel's largest markets.
The World Steel Association in October forecast steel demand would rise 2.1 percent in 2012, down from 6.2 percent in 2011. ArcelorMittal makes 6-7 percent of the world's steel, principally in Europe and the Americas.
The Luxembourg-based group has scaled back investments and made a number of divestments in the past year, but has really upped its debt-cutting efforts since Standard & Poor's became the first credit agency to cut the group's rating to junk in August.
It slashed its dividend to $0.20 per share this year, from $0.75 paid out in 2012, saving $1 billion.
A week ago, it said it would sell a 15 percent stake in one of its Canadian iron ore operations for $1.1 billion.
It has also been in a battle with the French government over the planned closure of two blast furnaces in Florange, in the east of the country.
(Additional reporting by Ben Deighton and Robin Emmott; Editing by Rex Merrifield and Mark Potter)