Moody's Affirms AK Steel (AKS) at 'B3'; Rates Upcoming Notes Offering

Moody's Investors Service assigned a Caa1 rating to the senior unsecured notes due in September 2021 issued by AK Steel (NYSE: AKS) (AK). The notes are guaranteed by AK Steel Holding Corporation. At the same time, Moody's affirmed the B3 corporate family rating (CFR) and B3-PD probability of default rating, the B2 rating on the existing senior secured notes, the Caa1 ratings on the existing senior unsecured and tax exempt financings. The Speculative Grade Liquidity rating remains SGL-3. The outlook is stable.

Proceeds from the new notes issue together with proceeds from AK Steel's equity issue will be used fund the $700 million acquisition of Severstal North America's Dearborn operations and certain joint ventures. The purchase price includes $300 million of working capital.

Assignments:

..Issuer: AK Steel Corporation

....Senior Unsecured Regular Bond/Debenture (Local Currency), Assigned Caa1, LGD5

Outlook Actions:

..Issuer: AK Steel Corporation

....Outlook, Remains Stable

Affirmations:

..Issuer: AK Steel Corporation

.... Probability of Default Rating, Affirmed B3-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

.... Corporate Family Rating (Local Currency), Affirmed B3

....Senior Secured Regular Bond/Debenture (Local Currency) Dec 1, 2018, Affirmed B2, LGD3

....Senior Unsecured Conv./Exch. Bond/Debenture (Local Currency) Nov 15, 2019, Affirmed Caa1, LGD5

....Senior Unsecured Regular Bond/Debenture (Local Currency) May 15, 2020, Affirmed Caa1, LGD5

....Senior Unsecured Regular Bond/Debenture (Local Currency) Apr 1, 2022, Affirmed Caa1, LGD5

..Issuer: Butler County Industrial Dev. Auth., PA

....Senior Unsecured Revenue Bonds (Local Currency) Jun 1, 2024, Affirmed Caa1, LGD5

..Issuer: Ohio Air Quality Development Authority

....Senior Unsecured Revenue Bonds (Local Currency) Jun 1, 2024, Affirmed Caa1, LGD5

..Issuer: Rockport (City of) IN

....Senior Unsecured Revenue Bonds (Local Currency) Jun 1, 2028, Affirmed Caa1, LGD5

RATINGS RATIONALE

AK's B3 CFR is weakly positioned reflecting its weak debt protection metrics and high leverage. The rating reflects our expectation that performance through 2014 and into 2015 will show gradual improvement on continued strength in the automotive industry and gradual improving trends in manufacturing and commercial construction. The rating also captures our expectation that cost challenges will ease given the softness in iron ore and coking coal prices, which we anticipate will persist into 2015.

While debt incurred to fund the Dearborn an related joint ventures acquisition will increase AK's already high leverage, as evidenced by the company's LTM June 30, 2014 debt/EBITDA ratio of 13.8x, the acquisition is viewed as strategically transforming for the company in that it will broaden AK's geographic production capacity, expand its ability to serve the automotive industry, bring procurement and transportation savings, and enable the company to better optimize its production runs. The Dearborn facility has an approximate 3.8 million ton hot-rolled sheet capacity plus cold rolled and galvanized capacity and will further expand AK's footprint in these areas. The acquisition is expected to increase AK's shipments by approximately 2.4 million tons to roughly 7.7 million tons and increase the company's sales to the automotive industry to about 3.9 million tons although exposure to the automotive industry will remain at approximately 50% of total shipments.

The LTM June 30, 2014 leverage position was heightened by the impact on EBITDA associated with the severe winter weather conditions that negatively affected first half 2014 performance causing reduced production levels and higher transportation, natural gas and electricity costs. Absent these issues, we estimate that LTM June 30, 2014 leverage would have ranged between 10x and 11x. AK's EBITDA is expected to evidence a stronger growth trend given the relative stability in steel industry capacity utilization rates, continued strength in the automotive market, improving fundamentals in commercial construction and general industry, particularly for electrical grain oriented steel, relative stability in hot rolled prices, lower costs reflective of the significant drop in iron ore prices, the ramp-up of production of iron ore pellets from Magnetation and the higher shipment levels with the acquisition of Dearborn. On an estimated combined shipment level of roughly 7.7 million tons and EBITDA/ton of between $55 and $65, leverage, proforma for the increased debt, would improve to between 6x and 7x. For the next one to two years, we expect the improvement in leverage and debt protection ratios to come from recovery in earnings as opposed to material reduction in debt.

The Caa1 rating on the senior unsecured notes reflect the junior position of these instruments, under Moody's loss given default methodology, relative to the secured notes, the $1.1 billion asset backed revolving credit facility (ABL) expiring in September 2016) and priority accounts payables. The company intends to upsize the ABL to $1.5 billion following closing of the acquisition.

The stable outlook reflects our view that AK will continue to evidence improving trends and debt protection metrics on higher shipment levels, price levels flat to improved from current levels ($1,095/ton average realized in the second quarter of 2014), higher value added product mix and a reduced cost position for strategic raw material inputs such as iron ore and coking coal. The company also expects to realize approximately $50 annually million in synergies, $25 million of which is expected to be achieved in 2015.

The rating could be downgraded should the company's liquidity position deteriorate materially due to weak operating performance and cash burn, EBIT margins not evidence an improving trend to at least 3.0%, EBIT-to-interest be sustained below 1.5x and debt/EBITDA not evidence an improving trend towards 6.0x. Given the company's weak metrics and our expectation that performance will show only gradually improving trends over the next 12 months, an upgrade is unlikely. Upward ratings momentum could occur should shipment levels, relative stability to improvement in steel prices and an improved cost position, lead to stronger credit metrics such that EBIT/interest is sustainable at 2.5x and debt/EBITDA improves to and is sustainable at no more than 5.0.

The principal methodology used in this rating was Global Steel Industry published in October 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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