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Rating Action:

Moody's downgrades U. S. Steel's ratings; CFR to Caa1 -- outlook negative

30 Mar 2020

New York, March 30, 2020 -- Moody's Investors Service, ("Moody's") downgraded United States Steel Corporation's (U. S. Steel) Corporate Family Rating (CFR) to Caa1 from B2, its Probability of Default rating to Caa1-PD from B2-PD and its senior unsecured ratings, including all Industrial Revenue Bond Ratings to Caa2 from B3. The Speculative Grade Liquidity Rating was downgraded to SGL-3 from SGL-2. The outlook has been revised to negative from stable.

"The rating downgrade reflects U. S. Steel's weaker debt protection measures than expected and increase in leverage to 6.7x in 2019 from 2.2x the prior year due to difficult market conditions and a weak price environment as well as the increase in debt to fund strategic investments, including the acquisition of a 49.9% interest in Big River Steel. Performance and metrics will further weaken in 2020 as a result of further softening in demand amidst expectations for lower GDP as the coronavirus spreads globally" said Carol Cowan Moody's Senior Vice President and lead analyst for U. S. Steel.

Downgrades:

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

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 (LGD4) from B3 (LGD4)

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

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 (LGD4)from B3 (LGD4)

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

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 (LGD4) from B3 (LGD4)

..Issuer: Indiana Finance Authority

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 (LGD4) from B3 (LGD4)

..Issuer: Ohio Water Development Authority

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 (LGD4) from B3 (LGD4)

..Issuer: Southwestern Illinois Development Authority

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 (LGD4) from B3 (LGD4)

..Issuer: United States Steel Corporation

.... Probability of Default Rating, Downgraded to Caa1-PD from B2-PD

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

.... Corporate Family Rating, Downgraded to Caa1 from B2

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to Caa2 (LGD4) from B3 (LGD4)

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2 (LGD4) from B3 (LGD4)

Outlook Actions:

..Issuer: United States Steel Corporation

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

This rating action is based upon the impact of the coronavirus, which is viewed as a social risk under our ESG framework, given the substantial implications for public health and safety. The impact of the coronavirus on the end markets to which U. S. Steel sells will meaningfully impact the company's earnings and cash flow generation in 2020 following the weaker performance in 2019.

The Caa1 CFR reflects the deterioration in performance and metrics that occurred in 2019, as prices declined on a quarterly basis with 4th quarter realized prices for North America flat-rolled down 12% from the 1st quarter, USSE down approximately 7% and tubular down around 16% all on a comparable quarter to quarter basis. Difficult market conditions in Europe, where the PMI remained below 50 for most of 2019, auto production declined, and the steel markets were challenged by imports resulted in USSE's segment EBITDA declined to $35 million. In the US, declining rig counts, softening in light vehicle production and general flat to down industrial demand contributed to the North American Flat-Rolled segment's EDITDA dropping 48% to $652 million while the Tubular segment EBITDA's loss widened to $21 million against weak market conditions, and industry high inventory levels from increased imports of OCTG despite lower imports overall. The first quarter of 2020 will remain weak while the second quarter will be further challenged given deteriorating economic conditions and temporary plant closures by US and European auto producers, important end markets for U. S. Steel. The duration of closures could extend longer than anticipated. With slowing economic activity, back up in the supply chains is also expected.

Given expectations for EBITDA generation in 2020 to decline between 25% and 44% relative to 2019 ($740 million with Moody's standard adjustments) leverage is likely to exceed 10x.

Given the further deterioration in market conditions unfolding in 2020, the company will immediately idle the Gary #4 blast furnace and begin to undertake the planned outage at a reduced scope and delay components of the originally planned outage. This blast furnace will remain idle until market conditions improve. In addition, Blast Furnace A at Granite City works will be temporarily idled. The Lorrain Tubular Operations in Ohio and Lone Star Tubular Operations in Texas.will be indefinitely idled commencing in late May.

Additionally, in order to minimize cash flow burn and maintain liquidity, capital spending in 2020 will be reduced to $750 million. Construction at the Mon Valley Works will be delayed, as will upgrades to the Gary Hot Strip Mill, while the Dynamo line development at USSE remains delayed. The company expects to complete the EAF at Fairfield with the first arc expected in the second half of 2020. The capital for this project was prefunded with the issuance of environmental revenue bonds in late 2019. This reduction in capital expenditures will minimize the level of negative cash flow generation, which based upon our assumed EBITDA decline, would be less than $500 million.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The steel sector is a sector that will be affected by the shock given its sensitivity to end market demand, such as automotive, OCTG, general manufacturing and sentiment. More specifically, the weaknesses in U. S. Steel's credit profile following a challenging 2019 have left it more vulnerable to shifts in market sentiment in these unprecedented operating conditions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

The SGL-3 speculative grade liquidity rating reflects the company's adequate liquidity with cash reducing to $749 million and $600 million drawn at year-end 2019 under its $2.0 billion asset based revolving credit facility (ABL), which contains a $150 million first in-last out tranche. U. S. Steel also had $190 million in restricted cash, largely reflecting the issuance of IRB's in 2019 for funding of the EAF at Fairfield.

Liquidity has been bolstered by the drawdown of a further $800 million under U. S. Steel's ABL to enhance its cash position. The extent to which the value of inventory and receivables in the borrowing base contract remains a risk to remaining availability.

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 coverage ratio allows for certain exclusions such as certain capital expenditures. The facility matures in October 2024 but 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 ($517 million equivalent at year-end December 31,2019) 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 $393 million was outstanding at December 31, 2019). 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

The negative outlook assumes that demand fundamentals for the steel industry in the US and Europe remain vulnerable to further deterioration in demand of uncertain duration and downward price trends. The outlook expects increased leverage and weaker debt protection metrics absent levers the company has to minimize negative cash flow and maintain adequate liquidity.

Factors that would lead to an upgrade or downgrade of the ratings:

Given the uncertainty as to the duration of weakening global conditions as well as the significant investment requirements over the next several years and need to execute on these strategic 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 4.5x through varying price points on the downside and (CFO-dividends) in excess of 10%, positive ratings momentum could develop. Should liquidity deteriorate or access to the ABL be reduced due to an imbalance between the size of the facility and the borrowing base, the ratings could be downgraded.

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 electric arc furnace (EAF), which have 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.

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. Revenues for the twelve months ended December 31, 2019 were $12.9 billion.

The principal methodology used in these ratings was Steel Industry published in September 2017 and available at https://www.moodys.com/research/Steel-Industry--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.

At At least one ESG consideration was material to the credit rating outcome announced and described above.

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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