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Rating Action:

Moody's assigns B3 Senior Unsecured rating to U. S. Steel's New Convertible Senior Notes; affirms all other ratings

16 Oct 2019

New York, October 16, 2019 -- Moody's Investors Service ("Moody's") assigned a B3 senior unsecured rating to United States Steel Corporation's (U. S. Steel) Convertible Senior Notes Due November 2026. Moody's affirmed the B2 Corporate Family Rating (CFR), the B2-PD Probability of Default Rating, and the B3 senior unsecured ratings, including the IRB's and the ERB's. The Speculative Grade Liquidity Rating is unchanged at SGL-2. The outlook is stable.

Assignments:

..Issuer: United States Steel Corporation

....Senior Unsecured Conv./Exch. Bond/Debenture, Assigned B3 (LGD4)

Outlook Actions:

..Issuer: United States Steel Corporation

....Outlook, Remains Stable

Affirmations:

..Issuer: Allegheny County Industrial Dev. Auth., PA

....Senior Unsecured Revenue Bonds, Affirmed B3 (LGD4)

..Issuer: Bucks County Industrial Development Auth., PA

....Senior Unsecured Revenue Bonds, Affirmed B3 (LGD4)

..Issuer: Hoover (City of) AL, Industrial Devel. Board

....Senior Unsecured Revenue Bonds, Affirmed B3 (LGD4)

..Issuer: Indiana Finance Authority

....Senior Unsecured Revenue Bonds, Affirmed B3 (LGD4)

..Issuer: Ohio Water Development Authority

....Senior Unsecured Revenue Bonds, Affirmed B3 (LGD4)

..Issuer: Southwestern Illinois Development Authority

....Senior Unsecured Revenue Bonds, Affirmed B3 (LGD4)

..Issuer: United States Steel Corporation

.... Probability of Default Rating, Affirmed B2-PD

.... Corporate Family Rating, Affirmed B2

....Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD4)

Unchanged:

..Issuer: United States Steel Corporation

.... Speculative Grade Liquidity Rating, Unchanged SGL-2

RATINGS RATIONALE

The B2 CFR reflects the increased leverage that will result from the financing of strategic investments to improve the productivity and cost position of U. S. Steel, including the pending acquisition of a 49.9% equity stake in Big River Steel LLC (B3 CFR -- Big River) for approximately $700 million. In addition to Big River, these investments are indicated to be around $1.6 billion over the next several years and include $1.2 billion for the endless casting & rolling facility and cogeneration facility at the Mon Valley works, $280 million for the construction of an electric arc furnace (EAF) in the tubular segment and $130 million for a new Dynamo line at U. S. Steel Europe (USSE). Although the company expects around $390 million in annual EBITDA improvement once all projects are completed and fully operational, the largest portion of this improvement is slated to come from the Mon Valley investment, which investment time frame is between 2019 and 2022. As such, meaningful uplift from this investment is not expected over the next several years although contribution from the new Dynamo line and the EAF is expected in 2020 and forward. Additionally, no returns from the Big River investment are expected over the next several years as Big River completes its expansion plans to double capacity to around 3.3 million tons. Consequently leverage is expected to remain elevated, peaking at around 6x, particularly if current market price conditions persist.

While U. S. Steel's metrics and leverage position remain strong for the twelve months through June 30, 2019, with debt/EBITDA of 2.4x and EBIT/interest of 4x, performance benefits from the substantive run-up in steel prices in 2018, which contributed to strong advancement in EBITDA that continues to be reflected in the LTM numbers. The B2 CFR anticipates weaker performance in the second half of 2019 and into 2020 given the drop-in steel prices that has been ongoing over the course of 2019, lag impact of such on performance, and expectation that there is no catalyst that will change the current market fundamentals in either the US or Europe. Steel prices have fallen steadily during 2019, with hot-rolled coil averaging $692/ton in the quarter through March, $614/ton for the quarter through June and we estimate that the third quarter will be around $580/$600 ton and not improve materially over the next several quarters with risk to the downside. Reflecting the difficult market environment in the US and Europe, U. S. Steel has temporarily idled two blast furnaces in the US and one in Europe.

Additionally, given the level of sales into the spot market, performance will continue to evidence significant volatility. Key end markets such as automotive and OCTG are slowing and industrial and machinery are expected to moderate as well. Consequently, leverage, as measured by the debt/EBITDA ratio is seen as peaking at about 5x. The CFR also considers the execution risk in the various projects underway and the need to complete in a timely fashion within expected budgets.

Although the debt protection metrics and leverage position are temporarily stretched, the CFR incorporates the strategic benefits of the investments in process, the investment in Big River, and the size and footprint of the company in the US steel industry.

U. S. Steel, like all producers in the global steel sector faces pressure to reduce greenhouse gas and air pollution emissions, among a number of other sustainability issues and will likely incur costs to meet increasingly stringent regulations. As such, the company faces longer term secular challenges in the ongoing shift away from blast furnace steelmaking to EAFs.

U. S. Steel and companies who produce steel using the blast furnace process ( integrated producers -use primarily coal and iron ore to produce steel) have higher greenhouse gas emissions and face greater challenges than producers who use the EAF process, which has a greater percentage of scrap (recycled steel) in the raw material mix. Additionally, with the move to increasingly higher CAFÉ standards, producers supplying the automotive industry face increasing competition from other materials such as aluminum. U. S. Steel continues to focus on its Advanced High- Strength Steel product development to help mitigate against this market erosion. The increasing use of debt in the capital structure, while for key strategic initiatives indicates a higher tolerance for leverage in the capital structure.

The SGL-2 speculative grade liquidity rating reflects the company's good liquidity but reduced cash position of $651 million at June 30, 2019 and availability under its $1.5 billion asset based revolving credit facility (ABL). Preliminary indications are that cash at September 30, 2019 has dropped to between $466 million and $476 million. The company will upsize the ABL to $2 billion with the closing of the announced Big River investment.

The ABL requires the company to maintain a fixed charge coverage ratio for the most recent four consecutive quarters should availability be less than the greater of 10% of the total aggregate commitment and $150 million. Given that the company would not be able to meet the coverage ratio, availability has been reduced by $150 million. 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. With the company's debt repayments in recent years, there are no senior note maturities until 2025, subsequent to the maturity date of the ABL. Given the increased capital spending anticipated over the next several years, U. S. Steel is expected to be modestly free cash flow negative, but this can be accommodated in the liquidity profile.

There is also a Euro 460 million unsecured credit facility at the company's U. S. Steel Kosice (USSK) subsidiary in Europe, which matures September 26, 2023. At June 30, 2019 Euro 260 million was available.

The stable outlook assumes that fundamentals in the steel industry will not materially deteriorate from current conditions and that U. S. Steel's liquidity will remain strong enough to accommodate negative cash flow over the investment horizon without further significant increases in debt. The outlook also considers that leverage will not be sustained above 5.5x, although leverage is expected to peak around 6x.

Given the significant investment requirements over the next several years and need to execute on these projects, a ratings upgrade is unlikely. However, should market conditions improve such that higher prices are sustainable, and the company can sustain leverage of no more than 4x through varying price points on the downside and (CFO-dividends) in excess of 15%, positive ratings momentum could develop. Should leverage deteriorate to and look to be sustained at over 5.5x and (CFO-dividends) be less than 10%, ratings could be downgraded.

Headquartered in Pittsburgh, Pennsylvania, U. S. Steel is the second largest flat-rolled 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 the US and Central Europe, U. S. Steel has a combined raw steel capacity of approximately 22 million tons. (US 17 million, Europe 5 million). Revenues for the twelve months ended June 30, 2019 were $14.5 billion.

The principal methodology used in these ratings 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, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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