New York, May 21, 2020 -- Moody's Investors Service, ("Moody's") assigned
a B2 rating to United States Steel Corporations (U. S. Steel)
$700 million guaranteed first lien senior secured notes.
All other ratings, including the Caa1 Corporate Family Rating (CFR)
were affirmed. The Speculative Grade Liquidity Rating is unchanged
at SGL-3. The outlook remains negative.
"The affirmation of the Caa1 CFR considers the capital raising to
increase liquidity to provide sufficient availability to accommodate the
anticipated negative performance and negative cash burn, particularly
in 2020" said Carol Cowan Moody's Senior Vice President and
lead analyst for U. S. Steel. Metrics in 2020 are
expected to stand well outside the Caa1 CFR with negative EBITDA anticipated
given current market conditions. A gradual recovery over the 2021/2022-time
frame is expected although cash burn remains likely. There is not
a lot of visibility at this time with respect to duration of plant closures
and bottoming of current conditions and the affirmation anticipates a
bottoming by the end of June and only very slow recovery thereafter.
Should performance over the next several quarters and market conditions
not evidence some degree of stabilization, albeit from low levels,
the CFR could be negatively impacted. Additionally, should
cash burn in 2020 be greater than currently expected, eating into
the cushion for subsequent years, the CFR could also be negatively
impacted over the next several quarters. The company is weakly
positioned in the Caa1 CFR rating category.
Affirmations:
..Issuer: United States Steel Corporation
.... Corporate Family Rating, Affirmed
Caa1
.... Probability of Default Rating,
Affirmed Caa1-PD
....Senior Unsecured Conv./Exch.
Bond/Debenture, Affirmed Caa2 (LGD5 from LGD4)
....Senior Unsecured Regular Bond/Debenture,
Affirmed Caa2 (LGD5 from LGD4)
..Issuer: Allegheny County Industrial Dev.
Auth., PA
....Senior Unsecured Revenue Bonds,
Affirmed Caa2 (LGD5 from LGD4)
..Issuer: Bucks County Industrial Development Auth.,
PA
....Senior Unsecured Revenue Bonds,
Affirmed Caa2 (LGD5 from LGD4)
..Issuer: Hoover (City of) AL, Industrial Devel.
Board
....Senior Unsecured Revenue Bonds,
Affirmed Caa2 (LGD5 from LGD4)
..Issuer: Indiana Finance Authority
....Senior Unsecured Revenue Bonds,
Affirmed Caa2 (LGD5 from LGD4)
..Issuer: Ohio Water Development Authority
....Senior Unsecured Revenue Bonds,
Affirmed Caa2 (LGD5 from LGD4)
..Issuer: Southwestern Illinois Development Authority
....Senior Unsecured Revenue Bonds,
Affirmed Caa2 (LGD5 from LGD4)
Assignments:
..Issuer: United States Steel Corporation
....Senior Secured Regular Bond/Debenture,
Assigned B2 (LGD2)
Outlook Actions:
..Issuer: United States Steel Corporation
....Outlook, Remains Negative
RATINGS RATIONALE
The Caa1 CFR anticipates that the $700 million capital raising
together with the existing cash position will accommodate the deterioration
in cash flow generation in 2020 and provide sufficient coverage for only
a slow recovery in the next several years.
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 has been
one of the sectors materially affected by the shock globally. U.
S. Steel's performance in its US and European operating footprint
is expected to be hard hit, particularly in the June 2020 ending
quarter given its sensitivity to end market demand, particularly
in key markets such as automotive, oil&gas, and general
industry. Sentiment with respect to the steel industry in the US
given the severe utilization and price declines and concerns over new
capacity in the next several years into an over supplied market notwithstanding
delays that have been announced are also impacting the perspective on
the industry. We regard the coronavirus outbreak as a social risk
under our ESG framework, given the substantial implications for
public health and safety.
The Caa1 CFR captures the deterioration in performance and metrics that
occurred in 2019, as the Flat-Rolled Products Segment experienced
relatively flat shipments and lower realized prices while U. S.
Steel Europe (USSE) saw declines in shipments and lower realized prices
due to the slowing in European economies and important end markets such
as automotive. The tubular segment continued to post negative EBITDA
on a continued decline in drilling activity and price pressure from increases
in OCTG imports. Consequently, U. S. Steel
entered 2020 with weaker debt protection metrics and increased leverage,
which has left the company more vulnerable to the severe deterioration
in market end demand for its products as a result of the coronavirus.
On a sequential basis the first quarter of 2020 was an improvement over
the fourth quarter of 2019 as the price upturn in the latter part of the
year contributed to higher realized prices given the lag flow through
effect. However, the spread of the coronavirus and impact
on manufacturing activity, particularly the shut-down of
automotive production in mid-March both in the US and Europe together
with the collapse of oil prices will result in severe compression in EBITDA,
earnings and cash flow in the second quarter as well as subsequent quarters,
and any recovery is expected to be slow.
Specifically, automotive, a key end market, has seen
production curtailed since approximately mid-March although phased
restarts in both the US and Europe commenced recently. However,
ramp up is expected to be slow. Additionally, production
levels will need to be evaluated against expected consumer demand given
the high unemployment levels and economic impact on consumers.
Current low oil prices and further reductions in drilling activity in
2020 will negatively impact the tubular segment; given the high pipe
inventory overhang; this segment will see only a protracted recovery.
Against this backdrop, the company's performance in 2020 will
be extremely adversely impacted with negative EBITDA expected, only
modest recovery the next several years and negative cash flow generation
likely to continue although at diminishing levels. Working capital
inflows will provide a modest mitigant to the diminished earnings and
cash flow.
Assuming shipments in 2020 were to decline 50% from 2019 levels
and EBITDA/ton be negative $40-$60/ton, negative
EBITDA ranging between approximately $300 million and $450
million would be incurred.
The actions taken by U. S. Steel to respond to the extremely
negative conditions, including idling of operations at Lone Star
Tubular, Lorain Tubular, the idling/indefinite idling of a
number of blast furnaces and additional other cost savings measures.
Capital expenditures have been reduced to $750 million and include
the delay of the Mon Valley Works projects as well as the delay of the
remaining Gary hot strip mill upgrades among others. Given anticipated
expansions by competitors in flat-rolled capacity, although
some delays have been announced, this could impact U. S.
Steel's competitive position over the next several years.
The negative outlook assumes that demand fundamentals for U. S.
Steel and the steel industry in the US and Europe remain vulnerable to
further deterioration of uncertain duration and further downward price
trends. The outlook also considers that conditions could deteriorate
beyond current expectations causing the liquidity cushion expected from
the capital transactions to diminish in 2020 leaving less of a runway
for 2020 and 2021.
The SGL-3 speculative grade liquidity rating reflects the improvement
in the company's liquidity profile following the $700 million
capital raise transaction. Pro-forma for the transaction
cash balances at March 31, 2020 would be $2.05 billion
(excluding restricted cash, the majority of which is for the Fairfield
EAF facility funded through an IRB). At March 31, 2020 the
company had drawn $1.5 billion under its $2 billion
asset based revolving credit facility (ABL- matures in October
2024), which contains a $150 million first in -- last
out tranche. 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.
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 with total availability reduced to $1.8
billion, leaving $300 million available to be drawn.
There is also a Euro 460 million ($504 million equivalent at March
31, 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 $384 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 B2 rating on the senior secured notes reflects their priority position
in the capital structure. The Caa2 ratings on the convertible notes
and senior unsecured notes 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
Given the expectations for only a slow recovery in U. S.
Steel's performance over the next several years, 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 the degree of cash burn exceed expectations and the liquidity run
way deteriorate more rapidly than anticipated the ratings could be downgraded.
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.
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 March
31, 2020 were $12.2 billion.
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 least one ESG consideration was material to the credit rating action(s)
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
