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Related Issuers
Rating Action:

Moody's downgrades Cliffs' ratings (CFR to Caa1) outlook negative

05 Jan 2016

New York, January 05, 2016 -- Moody's Investors Service downgrade Cliffs Natural Resources Inc. (Cliffs) Corporate Family Rating (CFR) and Probability of Default Rating to Caa1 and Caa1-PD from B1 and B1-PD respectively. At the same time Moody's downgraded the senior secured 1st lien notes to B1 from Ba2, the senior secured 2nd lien notes to B3 from B1 and the senior unsecured notes to Caa2 from B3. The rating for senior unsecured debt issuances under the company's shelf registration was downgraded to (P) Caa2 from (P)B3. The speculative grade liquidity rating was lowered to SGL-3 from SGL-2. The outlook is negative. This concludes the review for downgrade initiated on November 16, 2015.

The downgrade reflects the deterioration in the company's debt protection metrics and increase in leverage as a result of continued downward movement in iron ore prices and weak fundamentals in the US steel industry, which are resulting in lower shipment levels. With the reduction in realized iron ore prices in the company's US iron ore operations (USIO), although realizations are higher than the seaborne market, and roughly breakeven nature of the Asia Pacific iron ore operations (APIO), EBIT/interest for the twelve months ended September 30, 2015 has contracted to roughly 0.75x while leverage, as measured by the debt/EBITDA ratio, has increased to around 7.5x. Given our expectations for reduced shipments in 2016 and for seaborne iron ore prices (62%Fe) to average $40/ton with a stress case assumption of $30/ton, leverage in 2016 is expected to increase significantly, well into the double digits with interest coverage remaining well below 1x. Based upon the company's disclosures as to realized revenues-per-ton at various IODEX prices over the October - December 2015 time frame, we would not anticipate a material difference as we look at 2016 ranges.

Although Cliffs USIO business has a good contract base and its price realizations are not directly correlated to price movement in the seaborne market, the company's capital structure continues to reflect the debt levels associated with a larger company and prior to the write downs associated with its Canadian operations and the restructuring of these operations under the Canadian Companies' Creditors Arrangement Act (CCAA). Given current operating conditions in the US steel industry, we see no catalyst for improvement and believe Cliffs' remains exposed to possible further reduction in shipment levels. While the company has achieved cost reductions in both its USIO and APIO segments from actions taken as well as lower fuel costs and the benefit to the APIO operations of the depreciating Australian dollar, the magnitude of price decrease continues to be a material driver in weaker earnings performance.

Downgrades:

..Issuer: Cliffs Natural Resources Inc.

.... Corporate Family Rating, Downgraded to Caa1 from B1

.... Probability of Default Rating, Downgraded to Caa1-PD from B1-PD

.... Speculative Grade Liquidity Rating, Lowered to SGL-3 from SGL-2

....Senior Unsecured Shelf, Downgraded to (P)Caa2 from (P)B3

....Senior Secured 2nd Lien Notes, Downgraded to B3 (LGD3) from B1 (LGD3)

....Senior Secured 1st Lien Notes, Downgraded to B1 (LGD2) from Ba2 (LGD2)

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2 (LGD5) from B3 (LGD5)

Outlook Actions:

..Issuer: Cliffs Natural Resources Inc.

....Outlook, Changed To Negative From Rating Under Review

RATINGS RATIONALE

The Caa1 CFR reflects the contract nature of Cliffs US iron ore operations, which allow the company to achieve a realized price in excess of the seaborne prices. The rating also considers the company's material presence as a domestic iron ore producer and its symbiotic relationship with the US steel mills, which cannot economically source their iron ore requirements from overseas producers. The rating also considers the need to renegotiate the contracts with ArcelorMittal, which have expiry dates in December of 2016 and January of 2017. In 2014, ArcelorMittal accounted for approximately 40% of USIO revenues.

The SGL-3 speculative grade liquidity rating reflects our expectation for increased cash consumption on lower earnings and cash flow generation, as well as higher seasonal working capital requirements in the first several months of 2016. Liquidity is supported by $270 million in cash at September 30, 2015 and a $550 million asset backed credit facility (ABL), which expires the earlier of March 30, 2020 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 $75 million or 10% of the aggregate facility. At September 30, 2015 there were no borrowings under the ABL and $187.3 million in letters of credit issued. Given the level of receivables and inventory, the full commitment was not available and borrowing availability at September 30, 2015 was $255.6 million.

The negative outlook incorporates the weakness in the iron ore markets and expected continued volatility and pressure to the downside as well as the poor fundamentals in the US steel industry, the offtake market for Cliffs' iron ore. The outlook also reflects the need to renegotiate material offtake contracts within the next year.

The rating could be downgraded should performance not show an improving trend or should liquidity contract. Specifically, should debt/EBITDA continue below 7.5x, (CFO-dividends)/debt be less than 5%, and EBIT/interest not improve to at least 1x, the rating could be downgraded.

Should the company be able to achieve and sustain leverage, as measured by the debt/EBITDA ratio of no more than 5.5x, (CFO-dividends)/debt of at least 10% and EBIT/interest of at least 1.5x, an upgrade could be considered.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Cleveland, Ohio, Cliffs is the largest iron ore producer in North America with approximately 25.5 million equity tons of annual capacity. In addition, the company participates in the international seaborne iron ore markets through its subsidiary in Australia. Cliffs' operations at Bloom Lake are being restructured under the Canadian Companies' Creditors Arrangement Act CCAA) and in May 2015, its Wabush iron ore operations in Canada, which had been permanently closed, were included in the CCAA filing. For the twelve months ended September 30, 2015, the company had revenues of $2.4 billion (which includes revenues in the fourth quarter of 2014 from the Canadian and Coal segments, subsequently classified as discontinued operations). In December 2015, Cliffs' remaining coal operations - the Pinnacle Mine and the Oak Grove Mine were sold to Seneca Coal Resources, LLC. The transaction was valued at roughly $268 million based upon the assumption of all liabilities by Seneca Coal. Cliffs' revenues for the nine months ended September 30, 2015 were $1.5 billion.

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: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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SUBSCRIBERS: 212-553-1653

Moody's downgrades Cliffs' ratings (CFR to Caa1) outlook negative
No Related Data.
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