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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.
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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:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades Cliffs' ratings (CFR to Caa1) outlook negative
No Related Data.
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