S&P Downgrades AK Steel (AKS) to 'B-'; Sees Liquidity Position Strong Over Next 12 Months

Standard & Poor's Ratings Services said today it lowered its corporate credit rating on AK Steel (NYSE: AKS) to 'B-' from 'B'. The outlook is stable.

At the same time, we lowered our issue-level rating on the company's senior secured notes one notch to 'B+' from 'BB-'. Our recovery rating on the secured notes remains '1', indicating our expectation for very high (90% to 100%) recovery in the event of a payment default. We also lowered our issue-level rating on the company's senior unsecured notes one notch to 'CCC+' from 'B-'. Our recovery rating on the unsecured notes remains '5', indicating our expectation for modest (10% to 30%; at the upper end of the range) recovery in the event of a payment default.

"We expect AK Steel will maintain its strong liquidity position over the next 12 months, despite a challenging price and operating margin environment due mainly to imports," said Standard & Poor's credit analyst William Ferara. "We expect adjusted debt to EBITDA and EBITDA interest coverage will remain weak at above 10x and below 1.5x, respectively, in the next 12 months."

We could lower the rating if AK Steel's liquidity position were to deteriorate, resulting in availability under its asset-based lending (ABL) revolving credit facility falling below $200 million. This could occur if steel prices continued to fall significantly or if volumes declined due to economic conditions or end-market weakness in automotive or nonresidential construction. We could also lower the rating if financial measures weakened further, such as EBITDA interest coverage below 1x, debt to EBITDA significantly above 10x, or EBITDA margins notably below 4%.

We could consider a higher rating if steel market conditions improved and resulted in higher prices and operating margins and sustained stronger credit measures, with the company maintaining a strong liquidity position. Specifically, debt to EBITDA below 8x, EBITDA interest coverage of above 2x, and EBITDA margins of greater than 6% could lead to a higher rating. We view this scenario to be less likely over the next year given our expectation for low steel prices in this timeframe.

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