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Rating Action:

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

10 Dec 2020

New York, December 10, 2020 -- Moody's Investors Service, ("Moody's") changed United States Steel Corporation 's ("U. S. Steel") outlook to stable from negative. At the same time, Moody's affirmed all ratings including the Caa1 Corporate Family rating and the Caa1-PD Probability of Default rating. The Speculative Grade Liquidity Rating remains unchanged at SGL-3.

"The change in outlook to stable acknowledges the improving fundamentals in most of the end markets to which U. S. Steel sells, both in the US and in Europe, as well as the strong recovery in flat-rolled and other steel prices, which, while potentially overheated, are nonetheless likely to remain at favorable levels for continued performance improvement through the balance of 2020 and in 2021." said Carol Cowan, Moody's Senior Vice President and lead analyst for U. S. Steel. "The outlook change also acknowledges U. S. Steel's announcement that it is exercising its option to acquire the remaining equity of Big River Steel for $774 million from available cash, and the expected strategic benefits and lower cost production profile that full ownership will bring. However, a level of caution is incorporated with respect to the execution and timing of achieving the expected business strategic objectives" Cowan added.

Affirmations:

..Issuer: United States Steel Corporation

....Corporate Family Rating, Affirmed Caa1

....Probability of Default Rating, Affirmed Caa1-PD

....Senior Secured Regular Bond/Debenture, Affirmed B2 (LGD2)

....Senior Unsecured Conv./Exch. Bond/Debenture, Affirmed Caa2 (LGD5)

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa2 (LGD5)

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

....Senior Unsecured Revenue Bonds, Affirmed Caa2 (LGD5)

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

....Senior Unsecured Revenue Bonds, Affirmed Caa2 (LGD5)

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

....Senior Unsecured Revenue Bonds, Affirmed Caa2 (LGD5)

..Issuer: Indiana Finance Authority

....Senior Unsecured Revenue Bonds, Affirmed Caa2 (LGD5)

..Issuer: Ohio Water Development Authority

....Senior Unsecured Revenue Bonds, Affirmed Caa2 (LGD5)

..Issuer: Southwestern Illinois Development Authority

....Senior Unsecured Revenue Bonds, Affirmed Caa2 (LGD5)

Outlook Actions:

..Issuer: United States Steel Corporation

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

The Caa1 CFR reflects U. S. Steels weak debt protection metrics and high leverage as the impact of the coronavirus on its sales, revenues and earnings, particularly in the second quarter of 2020, which represents the trough of deterioration, compounded a weak performance in 2019. The most segment impacted was the North American flat-rolled products segment where for the nine months ended September 30, 2020 shipments of 6.5 million tons were down 21% from the comparable period in 2019.

With the resumption of automotive production in May and improving trends in other end markets, with the exception of the Oil Country Tubular Goods (OCTG) markets, where drilling activity remains depressed, the third quarter evidenced a pick-up in tons shipped in the North American segment as well as in the U. S. Steel Europe segment and a turnaround from the steep losses incurred in the first two quarters of 2020. Nonetheless EBITDA is expected to remain negative for the full year 2020.

Fundamentals in the steel industry have continued to show improvement in the back half of 2020 with better capacity utilization, longer lead times, and strengthened pricing (hot-rolled coil currently around $875/short ton from a bottom in the low $400's/short ton in May. The recent run-up in scrap prices are a contributing factor to the increased hot-rolled coil prices and together with elevated iron ore prices will restrain the degree of metal margin advancement that can be achieved. Nonetheless, given the current spread, metal margins will strengthen materially. Although the run-up in prices appears to be somewhat over heated given demand not expected to grow materially beyond pre coronavirus levels, prices are still expected to remain at healthy levels.

The strengthening price environment will be more reflected in U. S. Steel's performance in 2021 given the lag nature on its spot and adjustable contract business. Despite the improved operating environment, recovery in metrics to levels commensurate with the rating is expected to be slow but steady. Based upon third quarter run rates and improvement in EBITDA/ton, EBITDA in 2021, on a stand alone basis for U. S. Steel is expected to be around $600 million (unadjusted - approximately $750 million with Moody's standard adjustments) versus an EBITDA loss in 2020 anticipated at roughly negative $70 million (including Moody's standard adjustments). On this basis, leverage is expected to remain elevated at just under 8x in 2021. With the full ownership of Big River Steel (3.3 million net tons following completion of its Phase II-A expansion) in 2021 and the Fairfield EAF (1.6 million net tons) having started up -- shipments and lower costs on this production will benefit earnings performance although the inclusion of Big River Steel's debt (around $1.9 billion -- its capital structure will remain in place) will contribute to leverage remaining elevated despite EBITDA from Big River. Free cash flow is expected to be moderately negative given currently planned capital expenditures in 2021 of around $675 million.

The exercise of the option to acquire the balance of Big River represents an important part of U. S. Steels' strategic objective to be the "Best of Both" with respect to steel making capacity from EAF's and blast furnaces. Key priorities in this strategy beyond Big River include the endless casting and rolling project at Mon Valley, the upgrades to the Gary Hot Strip Mill and the Dynamo line project as USSK, which is currently delayed.

The SGL-3 speculative grade liquidity rating reflects U. S. Steels adequate liquidity position as evidenced by its cash position of $1.7 billion at September 30, 2020 (excluding restricted cash held as long-term). The company has a $2 billion asset based revolving credit facility (ABL- matures in October 2024), which contains a $150 million first in -- last out tranche. $500 million was outstanding under the ABL at September 30, 2020.

The facility 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 $200 million. The fixed charge ratio allows for certain exclusions such as certain capital expenditures. As U. S. Steel would not be able to meet the fixed charge coverage ratio the availability block is in effect reducing total availability by $200 million at September 30, 2020. Additionally, due to the levels of receivables and inventory qualifying for inclusion in the borrowing base being less than the facility total, availability was reduced by a further $294 million. Consequently, availability at September 30, 2020 was $1.0 billion.

The facility can be accelerated 91 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.

There is also a Euro 460 million ($539 million equivalent at September 30, 2020) secured credit facility (receivables and inventory) at the company's U. S. Steel Kosice (USSK) subsidiary in Europe, which matures in December 2024. Euro 350 million (roughly $410 million) was outstanding at September 30, 2020). The facility contains a net debt/EBITDA covenant for which the first measurement date is June 30, 2021 and a further covenant requiring that total equity be no less than 40% of total assets.

Structural considerations

The B2 rating on the senior secured notes reflects their priority position in the capital structure. The Caa2 ratings on the convertible notes, senior unsecured notes and IRB's reflects their effective subordination to the secured ABL and secured notes as well as priority payables.

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.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Should the improvement in market conditions be sustainable and the strategic business objectives of the "best of both" strategy be achieved with the acquisition of the remaining percentage of Big River, positive momentum on the rating could occur. Quantitatively, should U. S. Steel be able to sustain leverage of no more than 4.5x through varying price points on the downside and (CFO-dividends) in excess of 10%, ratings could be positively impacted.

Should debt protection metrics and leverage not evidence and improving trend or the degree of cash burn exceed expectations and the liquidity runway deteriorate more rapidly than anticipated the ratings could be downgraded.

Headquartered in Pittsburgh, Pennsylvania, United States Steel Corporation 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. Revenues for the twelve months ended September 30, 2020 were $10.0 billion.

The principal methodology used in these ratings was Steel Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1074524. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Glenn B. Eckert
Associate Managing Director
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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