Fitch Affirms U.S. Steel's IDR at 'BB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed United States Steel Corporation's (U.S. Steel; NYSE: X) Issuer Default Rating (IDR) and debt ratings at 'BB-'. A full list of rating actions follows at the end of this release.

The Rating Outlook is Stable.

KEY RATING DRIVERS

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 steel producers.

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 consumed.

The U.S. steel industry is challenged by low capacity utilization (about 77% on average for 2014 and 72% on average year to date 2015). Permanent closure at U.S. Steel Canada's Hamilton Works raw steelmaking operations and at the former RG Steel LLC plants should improve capacity utilization as should growth in construction demand. Growth in construction should also improve capacity utilization although lower rig counts driven by the drop in oil prices has reduced demand for oil country tubular goods which is a headwind to improved capacity utilization. Fitch Ratings believes that margins are vulnerable when capacity utilization is below 80% and that capacity utilization could remain below 80% through 2015.

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, defined benefit pension plans were underfunded by $966 million on a GAAP basis. 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 guidance for 2015 is $240 million and cash payments are expected to be $300 million (excluding any VEBA contributions and voluntary pension contributions). The company has voluntarily contributed $140 million per year to the main defined pension plan over each of the past nine years.

Fitch expects EBITDA of at least $700 million and free cash flow to be positive for 2015.

Key Assumptions:

--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;

--Pricing is expected to improve in 2016 and 2017 but Fitch believes upside is limited given global over supply. For 2015, Fitch Base Case price assumptions are $700/ton for the Flat-rolled product segment, $1450/ton for the Tubular segment, and $575/ton for the U.S. Steel Europe Segment;

--Cost improvement is anticipated with Carnegie Way initiatives.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Lack of material improvement in top line results or absence of liquidity enhancements over the next 12 - 18 months.

--Sustained through the cycle adjusted debt/EBITDAR of > 3.5x

Positive: Future developments that may lead to a positive rating action include:

--Debt levels materially reduced and free cash flow generation that is expected to be positive on average.

--Sustained through the cycle adjusted debt/EBITDAR of

LIQUIDITY AND DEBT STRUCTURE

U.S. Steel generated operating EBITDA of $1.4 billion and $528 million of free cash flow after capital expenditures of $501 million and dividends of $29 million for the latest 12 months (LTM) ended March 31, 2015. As of March 31, 2015, cash on hand was $1.3 billion; total debt was $3.5 billion; the $875 million inventory facility maturing July 20, 2016 and the $625 million receivables facility maturing July 12, 2016 were undrawn. The inventory facility has a 1.00:1.00 fixed-charge coverage ratio requirement only at such times as availability under the facility is less than $87.5 million. Fitch expects U.S. Steel to generate annual free cash flow of about $100 million on average.

Total Liquidity of $2.8 billion at March 31, 2015 compares with 2015 guidance of capital expenditure at $550 million, cash pension and other benefits at $300 million, and Fitch estimated net financial costs at $230 million.

At March 31, 2015, total debt/operating EBITDA was 2.6x. Fitch expects leverage to pop over 4x in 2015 given near term pricing and volume weakness but return to below 4x thereafter. Near-term scheduled maturities of debt are $378 million in 2015; $45 million in 2016; $500 million in 2017, $503 million in 2018 and $58 million in 2019. The 2015 maturity includes the $316 million convertible notes due in 2019. The Companies' Creditor Arrangement Act (CCAA) filing by U.S. Steel Canada (USSC) on September 16, 2014 is an event of default under the terms of the Province Note (C$150 million due 2015) loan agreement between USSC and the Province of Ontario. Failure by USSC to pay the Province Note would constitute an event of default under the indenture for the convertible notes that would enable the trustee or the holders of not less than 25% convertible notes to declare them immediately due and payable. The notes are trading over par and Fitch does not expect these notes to be put. The Province Note is not guaranteed by U.S. Steel.

FULL LIST OF RATING ACTIONS

--Long-term IDR affirmed at 'BB-';

--Senior secured credit facility upgraded to 'BB+' and assigned a Recovery Rating of RR1;

--Senior unsecured notes affirmed at 'BB-' and assigned a Recovery Rating of RR4.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988268

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988268

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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Fitch Ratings
Primary Analyst
Monica M. Bonar
Senior Director
+1-212-908-0579
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gregory Fodell
Associate Director
+1-312-368-3117
or
Committee Chairperson
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]

Source: Fitch Ratings

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