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Rating Action:

Moody's assigns B1 rating to Cliffs proposed gtd sr. unsec. notes

29 Apr 2019

New York, April 29, 2019 -- Moody's Investors Service, ("Moody's") assigned a B1 rating to Cleveland-Cliffs Inc. ("Cliffs") proposed $750 million guaranteed senior unsecured notes due in 2027. The B1 Corporate Family Rating (CFR), B1-PD Probability of Default Rating, SGL-1 speculative grade liquidity rating and all other instrument ratings are unchanged. The outlook remains stable.

Proceeds from the proposed issue will be used to repay in full the 4.875% senior notes due 2021 of which $114 million is outstanding at March 31. 2019. $600 million of proceeds will be used to tender for a portion of the 2025 guaranteed senior unsecured notes. The balance of proceeds are expected to be held in cash.

Assignments:

..Issuer: Cleveland-Cliffs Inc.

....Senior Unsecured Regular Bond/Debenture, Assigned B1 (LGD4)

RATINGS RATIONALE

The B1 CFR reflects Cliffs' improved operating performance, strengthened debt protection metrics, focus on debt reduction and strong position in the North American iron ore markets. The rating also considers the contract nature of the company's iron ore operations and the symbiotic relationship with US blast furnace steel mills. Improved fundamentals in the US steel industry on strengthened demand across many end markets as well as the impact of the Section 232 tariffs and quotas has contributed to improved utilization by the industry as well as significant increases in hot-rolled coil prices. This is impactful in that the ArcelorMittal contract contains a pricing adjustment for hot-rolled coil (HRC) steel, among other variables. In 2018, hot-rolled coil steel prices averaged $825/ton vs $621/ton in 2017 which contributed to robust margins and free cash flow generation. Although hot-rolled coil steel prices have trended down since mid-year 2018 (approximately $661/ton at April 26, 2019) prices appear to be near bottom and demand is expected to remain at levels comparable to 2018.

We expect leverage, as measured by the debt/EBITDA ratio, to remain comparable to the 3.1x at December 31, 2018. While the HRC price-related adjustments are anticipated to be lower compared to 2018, this will be partially offset by better iron ore prices in 2019 (average of $83/ton for the three months through March 31, 2019 compared to an average of $70/ton in 2018). Although the level of increase in operating performance seen in 2018 is not expected to be replicated in 2019, the overall favorable operating conditions are expected to hold in 2019 enabling Cliffs to continue to have strong cash flow generation and internally fund the construction of the $700 million hot-briquetted iron (HBI) production plant. Start-up is in mid-2020.

The rating incorporates the volatility in iron ore, pellet premium and hot-rolled coil prices as well as volatility in the performance of Cliffs end customer base. Additionally, the single commodity nature of the business and customer concentration is a limiting factor in the rating. The rating also considers the seasonality in the business profile and expectations for a weak first quarter relative to the rest of the year. The execution risk on the construction and start-up of the HBI facility and lack of committed offtake is also considered in the rating although these appear manageable and the HBI produced will be competitive due to freight advantages over imported pig iron and other forms of iron units.

The SGL-1 speculative grade liquidity rating is supported by good cash flow generation in 2018, approximately $430 million in cash at March 31, 2019 and a $450 million ABL, which expires the earlier of February 28, 2023 or a date that is 60 days prior to the maturity of existing debt as defined in the ABL. The facility contains a 1:1 fixed charge coverage requirement should availability be less than the greater of 10% of the aggregate facility and $35 million. Given the level of receivables and inventory, the full commitment was not available and borrowing capacity at March 31, 2019 was $240 million, net of the letters of credit. With the repayment of the notes due in 2021, the next maturity is $392 million in 2024.

The stable outlook reflects our expectation that Cliffs will continue to evidence acceptable earnings and debt protection and leverage metrics over the next twelve to eighteen months even if iron ore prices were to average in the $60/ton range and hot-rolled coil prices average around $700/ton. While leverage could spike at these levels in 2020 coming off the spending for the HBI facility, the company is expected to still maintain a robust liquidity position. Our price sensitivity range for seaborne iron ore is $45-$75/ton with a midpoint of $60/ton. Iron ore prices are currently at higher levels due to the tragic tailings dam collapse in Brazil and this will benefit producers until such time as the market recovers from the supply disruption. Cliff's price realizations are based upon contract terms and include a premium for pellets. The outlook also assumes that conditions in the US steel industry will remain comparable to those experienced in 2018 allowing for good volume performance for Cliffs. Capacity utilization in the US steel industry is expected to range between 75 - 80% while hot rolled coil prices are expected to average between $675 - $725/ton. End market demand conditions are expected to be comparable although automotive has come off its peak and is expected to be a bit softer albeit still solid.

The B1 rating on the senior guaranteed unsecured notes reflects the benefit of guarantees by the same guarantors as the senior secured notes, which provides them a slightly more favorable position in the capital structure relative to the senior unsecured notes, but also considers the effective subordination to the secured debt.

Given the capital spending requirements over the next year or so for the HBI facility and execution and start-up risk, a further rating upgrade is likely to be more measured. Successful ramp of the HBI facility and committed offtake would be favorable considerations. Should the company be able to sustain EBIT/interest at 4x, debt/EBITDA of no more than 3x and (CFO-Dividends)/debt of at least 25%, positive rating momentum could develop. Should liquidity deteriorate beyond what is expected to be used to support the HBI investment, debt/EBITDA be sustained above 4x or (CFO-Dividends)/debt be sustained below 15%, the ratings could be downgraded.

Headquartered in Cleveland, Ohio, Cleveland-Cliffs is the largest iron ore producer in North America with approximately 21.2 million equity tons of annual capacity. The reorganization plan for Wabush and Bloom Lake has been approved by the Canadian courts and this process is now concluded. The sale of its Asia Pacific assets was completed in August 2018. For the twelve months ending March 31, 2019 Cliffs had revenues of $2.3 billion.

The principal methodology used in these ratings was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carol Cowan
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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