Fitch Ratings downgrades United States Steel IDR to BB-

Metal Stocks  |  2012-05-04 07:30:49   |   By

The Stable Outlook reflects Fitch's view that U.S. Steel's liquidity is sufficient to support operations should the recovery remain weak for the next 12-18 months.

NEW YORK (Scrap Monster): Fitch Ratings downgrades United States Steel Corporation's (U.S. Steel; NYSE: X) Issuer Default Rating (IDR) to 'BB-' from 'BB'. The Rating Outlook is Stable. A full list of ratings actions follows this release.

The ratings reflect adequate liquidity, weak but improving market conditions, and a period of higher financial leverage while earnings are below expected average.

The Stable Outlook reflects Fitch's view that U.S. Steel's liquidity is sufficient to support operations should the recovery remain weak for the next 12-18 months.

Fitch believes that free cash flow could be negative $160 million to neutral in 2012 given high capital spending offset by a modest work down of raw material inventory. Capital expenditures are expected to remain at elevated levels with projects to improve costs or for new products.

While management has a high degree of control over its raw materials, the company has a large fixed cost base and industry-wide capacity utilization in North America has been less than 80%, thereby pressuring earnings. Industry-wide capacity utilization has averaged 78% in the U.S. for the year to date and recently hit 81%, and U.S. Steel's capacity utilization for North America for the first quarter was 83%. There is no raw steel being produced in Hamilton, which accounts for 2.3 million net tons or 9.5% of annual North American capacity.

EBITDA for the year is expected to be $1.5 billion improving over the recovery to about a $2 billion run-rate. EBITDA was $375 million in 1Q'12 compared with $64 million in 1Q'11 and a loss of $8 million in 4Q'11. EBITDA was $836 million in 2011, $520 million in 2010 and a loss of $1.1 billion in 2009. In January 2012, the company divested U.S. Steel Serbia, which posted losses from operations in the amount of $17 million in 1Q'12 and $206 million in 2011. Debt at March 31, 2012, pro forma for the redemption of the $300 million due in 2013, was $3.9 billion. Fitch expects leverage to remain under 4 times.

Liquidity is adequate with pro forma cash on hand at March 31, 2012 of $328 million, and the $875 million inventory backed revolver and the $625 million accounts receivable facility were fully available. The revolver expires July 20, 2016, and the receivables facility expires July 18, 2014. The revolver has a 1.00:1.00 fixed charges coverage ratio requirement only at such times as availability under the facility is less than the greater of 10% of total commitments and $87.5 million.

Pro forma scheduled maturities of debt are estimated to be $20 million in 2012, $863 million in 2014, and $178 million in 2015. The $863 million due in 2014 is an out-of-the-money convertible issue.

Capital expenditure guidance for 2012 is $900 million. Fitch expects interest expense in the range of $240 million to $255 million.

A review of the ratings would be warranted should liquidity deteriorate beyond current expectations or if results are weaker than expected. Fitch would consider a positive rating action if debt levels are materially reduced.

Fitch downgrades the following ratings for U.S. Steel:

--Long-term IDR to 'BB-' from 'BB';

--Senior secured credit facility to 'BB' from 'BB+';

--Senior unsecured notes to 'BB-' from 'BB'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology' dated Aug. 13, 2011.