Fitch Downgrades U.S. Steel's IDR to 'B+'; Outlook Negative
Fitch Ratings has downgraded United States Steel Corporation's (U.S.
Steel; NYSE: X) Issuer Default Rating (IDR) and senior unsecured debt
ratings to 'B+' from 'BB-'. The senior secured credit facility has been
affirmed at 'BB+/RR1' A full list of rating actions follows at the end
of this release.
KEY RATING DRIVERS
The Rating Outlook has been revised to Negative. Improvement in earnings
and cash flow will require better oil prices and a reduction in import
competition. While Fitch expects trade cases to result in a reduction in
the market share of imports and views current oil prices as
unsustainably low, visibility into the timing of the recovery is limited.
Lower rig counts have hit the company's oil country tubular goods
volumes and import competition and weak iron ore prices have filtered
through to lower steel prices which lowered earnings expectations.
Tubular shipments for the year through Sept. 30, 2015 were 465,000 tons
compared with 1.3 million tons in the year through Sept. 30, 2014.
Flat-rolled prices averaged $674/ton in the third quarter compared with
$772/ton on average for the full year in 2014.
Hard freeze of the pension fund, capacity closures, more efficient raw
materials sourcing, and better working capital management have
benefitted earnings and cash flows but not enough to offset the impact
of weakening demand and global overcapacity.
Imports have been very strong given very high relative prices in the
U.S. combined with global over capacity. Steel demand related to oil
country tubular goods has fallen with the drop in oil prices
contributing to the modest decline in overall consumption despite strong
demand from autos, appliances and construction. Capacity utilization was
72% on average for the year through November 2015. Fitch Ratings
believes that margins are vulnerable when capacity utilization is below
80% and that capacity utilization could remain below 80% through 2016.
The domestic steel market has shown supply discipline, but global
overcapacity and lack of discipline elsewhere has limited pricing power.
Increased supply of iron ore and coking coal coupled with slower growth
in steel production has resulted in raw materials deflation.
As of Dec. 31, 2014, the defined benefit pension plans were underfunded
by $966 million on a GAAP basis. Re-measurements as of Sept. 30, 2015
increased the underfunding by $295 million. Pension and other
post-employment benefit costs were $312 million for 2014 and cash
payments were $545 million including the $140 million voluntary
contribution to the main U.S. defined benefit pension plan. Costs for
2015 are expected to be $245 million and cash payments are expected to
be $300 million. U.S. Steel has no mandatory contribution requirement
for its main U.S. defined-benefit pension plan in 2015.
The ratings reflect U.S. Steel's leading market positions in flat-rolled
and tubular steel in the U.S., together with its high degree of control
over its raw materials offset by the high fixed costs of integrated
U.S. Steel is the second largest North American flat-rolled steel
producer with capacity of 19.4 million tons; 2014 shipments were 14
million tons. U.S. Steel is the largest integrated North American
tubular producer, with capacity of 2.8 million tons; 2014 shipments were
1.7 million tons. U.S. Steel also operates a five million ton per year
integrated steel operation in Kosice, Slovakia.
U.S. Steel's production of iron ore pellets including from its share of
joint ventures was 25 million tons in 2014, accounting for a significant
share of its needs. In 2014, North American raw steel produced was 17
million tons and, assuming 1.3 tons of iron ore pellets are needed to
produce 1 ton of raw steel, 22 million tons of iron ore pellets were
--Fitch expects 2015 to be a trough year for domestic flat rolled and
tubular products with modest improvement in 2016 and 2017;
--Fitch expects capital expenditures at guidance in 2015 and at
maintenance levels in 2016;
--Pricing is expected to improve modestly in 2016 and 2017 but Fitch
believes upside is limited given global over supply. For 2016, Fitch
Base Case price assumptions are $680/ton for the Flat-rolled product
segment, $1,445/ton for the Tubular segment, and $545/ton for the U.S.
Steel Europe Segment;
--Cost improvement is anticipated with Carnegie Way initiatives.
Negative: Future developments that may, individually or collectively,
lead to negative rating action include:
--Deterioration in liquidity coupled with cash burn greater than $300
million in aggregate in 2016 and 2017;
--Weaker than expected operating results, whether from lack of recovery
in tubular demand or from unfavorable resolution of trade cases,
resulting in adjusted debt/EBITDAR sustainably above 4.5x.
--A debt financed recapitalization or debt financed acquisition. Fitch
views this event as unlikely
Positive: Future developments that may lead to a positive rating action
--Debt levels materially reduced and free cash flow generation that is
expected to be positive on average.
--Faster than expected turnaround in market dynamics allowing positive
free cash flow generation.
--Total adjusted debt/EBITDAR sustainably below 4.0x
LIQUIDITY AND DEBT STRUCTURE
U.S. Steel generated operating EBITDA of $665 million with negative free
cash flow of $22 million after $230 in gross interest, capital
expenditures of $546 million and dividends of $29 million in the latest
12 months ended September 30, 2015. Pro forma for the redemption of the
$316 million in convertible notes to be repaid, as of Sept. 30, 2015,
cash on hand was $849 million; total debt was $3.2 billion; and the $1.5
billion facility maturing in July 2020 was undrawn. The facility has a
1.00:1.00 fixed-charge coverage ratio requirement only at such times
that availability under the facility is less than the greater of 10% of
total commitments. Fitch expects U.S. Steel to burn about $200 million
in free cash flow in 2016.
At Sept. 30, 2015, total debt/operating EBITDA was 5.25x. Fitch expects
the company will make its revised EBITDA guidance of $225 million in
2015 and will earn about $389 million in EBITDA for 2016 resulting in
very high leverage. With partial recovery in shipments and modest
pricing improvement, Fitch expects EBITDA to approach mid-cycle levels
of about $1 billion in 2017 dropping leverage to below 4x by the end of
2017. Near-term scheduled maturities of debt are $45 million in 2016,
$500 million in 2017, $503 million in 2018 and $58 million in 2019.
FULL LIST OF RATING ACTIONS
Fitch has taken the following actions:
United States Steel Corporation
--Long-term IDR downgraded to 'B+' from 'BB-';
--Senior secured credit facility affirmed at 'BB+/RR1';
--Senior unsecured notes downgraded to 'B+/RR4' from 'BB-/RR4'.
The Rating Outlook has been revised to Negative.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers (pub. 07 Dec 2015)
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