Fitch Rates U.S. Steel's Proposed $250MM Sr Convertible Notes and $250MM Sr
NEW YORK -- March 20, 2013
Fitch Ratings assigns a 'BB-' rating to United States Steel Corporation's
(U.S. Steel; NYSE: X) new senior convertible notes to mature April 1, 2019 and
new senior notes due 2021. U.S. Steel stated that it intends to use the net
proceeds of the notes for repurchases of indebtedness focusing on near-term
maturities and for general corporate purposes. A full list of ratings follows
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 24.3 million tons; 2012 shipments were 16 million tons. U.S.
Steel is the largest integrated North American tubular producer with capacity
of 2.8 million tons; 2012 shipments were 1.9 million tons.
U.S. Steel's production of iron ore pellets from its own operations was 21.4
million tons and from its share of joint ventures was 2.9 million tons in
2012, accounting for a significant share of its needs.
The U.S. steel industry is challenged by low capacity utilization (about 76%
on average for 2012) as a result of slow recovery in manufacturing and
construction. Fitch believes that margins are vulnerable when capacity
utilization is below 80%, especially in a rising/high raw material cost
environment. Fitch expects iron ore prices to decline and metallurgical coal
prices to stabilize affording modestly better margins in 2013 compared with
2012. Fitch's base case iron ore price assumption (fines 63.5% CFR China) is
expected to decline by $10/tonne in 2013 relative to the average for 2012 and
a further $20/tonne longer term.
Continued softness in the construction markets should constrain the rebound in
steel demand over the next 12?18 months. The domestic market has shown supply
discipline but global overcapacity and lack of discipline elsewhere has
limited pricing power while bidding up raw material prices.
U.S. Steel generated operating EBITDA of $1.1 billion and $383 million of free
cash flow after capital expenditures of $723 million and dividends of $29
million for 2012. As of Dec. 31, 2012, cash on hand was $570 million; total
debt was $3.9 billion; the $875 million inventory facility maturing July 20,
2016 and the $625 million receivables facility maturing July 18, 2014 were
fully available. 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.
Total liquidity of $2.3 billion compares with 2013 guidance of capital
expenditure at $800 million, cash pension and other benefits at $550 million,
and Fitch estimated net financial costs at $235 million.
As of Dec. 31, 2012, defined benefit pension plans were underfunded by $2.7
billion on a GAAP basis. Pension and other post-employment benefit costs were
$512 million for 2012 and cash payments were $707 million including the $140
million voluntary contribution to the main U.S. defined benefit pension plan.
Costs guidance for 2013 is $440 million. The company has voluntarily
contributed $140 million per year to the main defined pension plan over each
of the past seven years. U.S. Steel expects that it will not be required to
make mandatory contributions through 2016 as long as it makes $140 million in
annual voluntary contributions and assuming future asset performance is
consistent with U.S. Steel's long-term return assumption of 7.75%.
Fitch expects leverage to remain below 4x through 2013 with scant debt
repayment. Near-term scheduled maturities of debt are $2 million in 2013; $865
million in 2014; and $190 million in 2015. The 2014 maturity is a convertible
issue with an initial conversion price of $31.875 per share.
Fitch expects EBITDA of at least $1 billion and free cash flow generation to
be neutral for 2013. Fitch believes that U.S. Steel's liquidity is sufficient
to support operations should the recovery remain weak for the next 12-18
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Deterioration in liquidity coupled with cash burn greater than anticipated;
--Weaker than expected operating results;
--A debt-financed recapitalization or debt-financed acquisition. Fitch views
these events as unlikely.
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Sustained positive free cash flow generation and debt repayment.
Fitch currently rates U.S. Steel as follows:
--Long-term Issuer Default Rating 'BB-';
--Senior secured credit facility 'BB';
--Senior unsecured notes '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. 8, 2012.
Applicable Criteria and Related Research
Corporate Rating Methodology
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Monica M. Bonar, +1 212-908-0579
Fitch Ratings, Inc.
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