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Rating Action:

Moody's changes U. S. Steel's outlook to positive; affirms all ratings

28 Jul 2017

New York, July 28, 2017 -- Moody's Investors Service, ("Moody's") changed United States Steel Corporation's (U. S. Steel) outlook to positive from negative. At the same time, Moody's affirmed the B3 Corporate Family Rating (CFR) the B3-PD Probability of Default Rating, the B1 senior secured rating, the Caa1 senior unsecured rating, including the IRB's ratings and the (P) Caa1 rating on the company's shelf registration for senior unsecured debt issuance. The Speculative Grade Liquidity Rating is unchanged at SGL-2.

The change in outlook to positive acknowledges the steps the company has taken to improve its productivity and efficiency of operations but more importantly the improved fundamentals for its US mills operating performance, as evidenced by a significant turn-around in the company's performance in the quarter ended June 30, 2017. Although better US steel industry fundamentals have played a part in this improvement, U. S. Steel's focus on each operating site has also contributed to the improvement. While it is likely the increase in drilling rig activity may have peaked, given the recent weakness in oil prices, and automotive sales are slowing, we expect the company's leverage, as measured by the debt/EBITDA ratio to improve to about 5x by the end of 2017 versus the 5.7x position (on a Moody's adjusted basis) for the twelve months ended March 31, 2017, despite expectations that EBITDA in the second half of 2017 is unlikely to continue at the pace seen in the quarter ended June 30, 2017. Nonetheless, the year-on-year improvement in 2017 will be significant.

Outlook Actions:

..Issuer: United States Steel Corporation

....Outlook, Changed To Positive From Negative

Affirmations:

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

....Senior Unsecured Revenue Bonds, Affirmed Caa1 to (LGD5) from (LGD4)

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

....Senior Unsecured Revenue Bonds, Affirmed Caa1 to (LGD5) from (LGD4)

..Issuer: Gulf Coast Waste Disposal Authority, TX

....Senior Unsecured Revenue Bonds, Affirmed Caa1 to (LGD5) from (LGD4)

..Issuer: Indiana Finance Authority

....Senior Unsecured Revenue Bonds, Affirmed Caa1 to (LGD5) from (LGD4)

..Issuer: Lorain County Port Authority, OH

....Senior Unsecured Revenue Bonds, Affirmed Caa1 to (LGD5) from (LGD4)

..Issuer: Ohio Water Development Authority

....Senior Unsecured Revenue Bonds, Affirmed Caa1 to (LGD5) from (LGD4)

..Issuer: Southwestern Illinois Development Authority

....Senior Unsecured Revenue Bonds, Affirmed Caa1 to (LGD5) from (LGD4)

..Issuer: United States Steel Corporation

.... Probability of Default Rating, Affirmed B3-PD

.... Corporate Family Rating, Affirmed B3

....Senior Unsecured Shelf, Affirmed (P)Caa1

....Senior Secured Regular Bond/Debenture, Affirmed B1 (LGD2)

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa1to (LGD5) from (LGD4)

RATINGS RATIONALE

The B3 CFR considers U. S. Steel's elevated leverage, low interest coverage and weak operating margins. While fundamentals for the steel industry have strengthened with overall higher capacity utilization and prices, and the drilling rig count has been increasing from severe lows, these favorable trends have only been slowly reflected in U. S. Steel's performance. However, the company's performance for the quarter ended June 30, 2017, of roughly $340 million in EBITDA (unadjusted), reflecting a significant improvement on a sequential basis over the approximate $67 million in the first quarter. While we expect the second half of 2017 may not replicate the performance of the June quarter, the company's ability to generate more solid results than seen in recent years is viewed as sustainable.

The rating also reflects our expectation that the steel and oil & gas industry fundamentals will remain better than evidenced in 2016 although some pressure to the downside is expected in the remaining months of 2017.

The rating considers U. S. Steel's relatively high costs as a percentage of sales given the less than optimal fixed cost absorption capability on reduced production and shipment levels as well as its material exposure to the OCTG market. The company's rating favorably considers 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.

The positive outlook reflects our expectation that U.S. Steel will be able to run at a higher earnings and EBITDA rate than achieved in recent years. The outlook also considers that performance in the balance of 2017 and into 2018 could moderate from the levels achieved in the second quarter of 2017. In addition, there remain a number of event drivers, such as the Section 232 review and other trade cases pending that will impact the US steel's industry performance and U.S. Steel's performance as well.

U. S. Steel's ratings could be upgraded should the company demonstrate that it can achieve and maintain leverage, as measured by the debt/EBITDA ratio of no more than 4.5x and EBIT/interest of at least 2x while continuing to maintain a solid liquidity position. The ratings could be downgraded if performance over the near term does not show improving trends such that EBIT/interest is below 1.5x and leverage does not moderate to at least 5.5x. Ratings could also be downgraded should liquidity contract meaningfully or if market conditions reverse or deteriorate from current more favorable conditions.

The SGL-2 speculative grade liquidity rating reflects the company's solid cash position of $1.5 billion at June 30, 3017 and availability under its $1.5 billion asset based revolving credit facility. Availability at June 30, 2017 was just under the facility size as the level of receivables and inventory as calculated under the borrowing base did not fully support the $1.5 billion. The facility requires the company to maintain a 1:1 fixed charge coverage ratio should availability be less than $150 million. The company met this coverage ratio for the four quarters ended June 30, 2017.The facility matures in July 2020 but can be accelerated 91 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 2020 and other smaller facilities at USSK.

STRUCTURAL CONSIDERATIONS

The B1 rating on the senior secured notes under Moody's Loss Given Default Methodology reflects their stronger position in the capital structure relative to the senior unsecured notes. The Caa1 rating on the senior unsecured notes reflects their weaker position relative to the secured ABL and senior secured notes as well as priority payables.

PROFILE

Headquartered in Pittsburgh, Pennsylvania, United States Steel Corporation is the second largest flat-rolled steel producer in North America 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 June 30 2017 were 11.2 billion.

The principal methodology used in these ratings was Global Steel Industry published in October 2012. 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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