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Rating Action:

Moody's assigns B2 rating to U. S. Steel's sr. unsec note issue; outlook stable

13 Mar 2018

New York, March 13, 2018 -- Moody's Investors Service, ("Moody's") assigned a B2 rating to United States Steel Corporation's (U. S. Steel) senior unsecured notes due in March 2026, which are being issued under the company's shelf registration rated (P)B2 for senior unsecured debt. All other ratings, including the speculative grade liquidity rating, remain unchanged. Proceeds, together with cash on hand, are being used to redeem the 8.375% senior secured notes due in 2021. The Ba2 rating on the senior secured notes will be withdrawn upon repayment. The outlook is stable.

Assignments:

..Issuer: United States Steel Corporation

....Senior Unsecured Regular Bond/Debenture, Assigned B2 (LGD4)

RATINGS RATIONALE

The B1 Corporate Family Rating (CFR) reflects U. S. Steel's improving earnings performance in 2017, strengthened debt protection measures and reduced leverage. Leverage, as measured by the debt/EBITDA ratio (including Moody's standard adjustments), improved to 3.1x at December 31, 2017 from 7.5x the prior year. "The company's continued focus on debt reduction in combination with a material improvement in EBITDA contributed to the overall improvement in leverage" said Carol Cowan, Senior Vice President.

The company evidenced significant improvement in its earnings and cash flow from operations in 2017, in particular in the flat rolled segment on higher steel prices and improved utilization levels despite cost creep while the tubular segment also showed good improvement from the high level of losses incurred in 2016 and was roughly EBIT breakeven in the fourth quarter of 2017. U. S. Steel Europe continued to provide a strong contribution on improved fundamentals in the European steel markets although costs there have also experienced an upward bias. In addition, U. S. Steel continued its liability management initiatives in 2017 that reduced its debt levels by approximately $330 million, including $200 million repaid on its senior secured notes. Improved productivity and efficiency gains also contributed to earnings growth despite higher raw material costs and increased maintenance & outage costs due to its asset revitalization program. Reflective of these actions, leverage ratio, as measured by adjusted debt/EBITDA is expected to remain below 4.0x and debt protection metrics above 2.0x over the next 12-18 months, an appropriate level for the B1 rating.

Operating performance benefitted from higher steel prices across all businesses, in particular the flat-rolled segment that generated $380 million in earnings, versus a segment loss of $3 million in 2016, despite lower shipments during the year. Shipments across all other segments increased in 2017. The Tubular segment, although it showed a good turn-around in 2017 as growing drilling rig counts and improved prices helped reduce segment losses to $99 million in 2017 compared to a loss of $304 million in 2016, remains a challenged segment. The company's rating favorably views its position as a leading North American flat-rolled steel producer whose footprint is further enhanced by its diversification in Central Europe. The rating also benefits from the company's good liquidity profile and long dated maturity profile following the repayment of the notes due in 2021.

The stable outlook reflects our view that fundamentals for the US steel industry will remain favorable in 2018 with continued improvement in commercial construction, the OCTG markets, the industrial and machinery markets and continued strength in the automotive market, although this has peaked from the highs seen in recent years. While prices are likely to continue to experience volatility, the degree is not anticipated to mirror that seen in years prior to 2017. Although cost creep is also anticipated, the outlook incorporates our expectation that U. S. Steel will be able to maintain earnings and credit metrics commensurate with its B1 rating in 2018 and a good cash flow generation that will continue to support its asset revitalization program and increasing investment in the Tubular and European businesses. There remain a number of event drivers, such as the Section 232 review and other trade cases pending that will impact the US steel industry and U. S. Steel's performance.

U. S. Steel's ratings could be upgraded should the company demonstrate the ability to sustain its leverage, as measured by the debt/EBITDA ratio, at no more than 3.75x and EBIT/interest at more than 3x while continuing to maintain a solid liquidity position and successfully executing on the asset revitalization program. The ratings could be downgraded if EBIT/interest is sustained below 1.5x and leverage returns to 4.5x or greater. Ratings could also be downgraded should liquidity contract meaningfully or if market conditions reverse or deteriorate from current more favorable conditions.

The SGL-1 speculative grade liquidity rating reflects the company's solid cash position of approximately $1.6 billion at December 31, 2017 and availability under its $1.5 billion asset based revolving credit facility (ABL). We believe that availability at December 31, 2017 exceeded the facility size as the level of receivables and inventory as calculated under the borrowing base provided improved collateral levels. The facility requires the company to maintain a 1:1 fixed charge coverage ratio should availability be less than $150 million and the company is expected to remain in compliance. The facility matures February 26, 2023 but can be accelerated 45 days prior to the maturity of any senior debt outstanding if certain liquidity conditions are not met.

U. S. Steel also has a Euro 200 million unsecured credit facility (no borrowings) at its USSK subsidiary in Europe, which expires in July 2021 and other smaller facilities at USSK.

STRUCTURAL CONSIDERATIONS

The B2 rating on the senior unsecured notes reflects their effective subordination relative to the secured ABL and priority payables.

PROFILE

Headquartered in Pittsburgh, Pennsylvania, United States Steel Corporation is the second largest flat-rolled steel producer in the US in terms of production capacity. The company manufactures and sells a wide variety of steel sheet, tubular, and tin products across a broad array of industries, including service centers, transportation, appliance, construction, containers, and oil, gas and petrochemicals. Through its major production operations in North America and Central Europe, U. S. Steel has a combined annual raw steel capacity of approximately 22 million tons (US -17 million, Europe -- 5 million). Revenues for the twelve months ended December 31, 2017 were $12.25 billion.

The principal methodology used in this rating was Steel Industry published in September 2017. 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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