U.S. Steel Ratings Put on CreditWatch Negative

S&P says benefits from the steelmaker's deal to buy National Steel may be offset by weaker credit protection measures

On Jan. 9, 2003, Standard & Poor's Ratings Services placed its ratings on U.S. Steel (X ) on CreditWatch with negative implications (see list below). The action followed the announcement that the company plans to acquire substantially all of bankrupt National Steel Corp.'s steelmaking and finishing assets for approximately $950 million (including the assumption of $200 million of liabilities). U.S. Steel will not inherit National's pension and retiree healthcare liabilities. Financing for the transaction will include a $100 million common stock offering with the balance funded through available cash, existing credit facilities and the issuance of equity-linked and debt securities.

Although the acquisition of National Steel would improve the the company's market position and result in annual synergies of $170 million in two years, Standard & Poor's is concerned that these benefits may be more than offset by weaker credit protection measures given the increase in debt leverage, declining steel prices, and increasing pension costs at U.S. Steel. Moreover, the acquisition of National and the expected sale of the company's more stable mining and transportation assets to Apollo Management would be somewhat detrimental to U.S. Steel's business profile.

With National, the company's operating leverage will increase from already high levels and subject the company to greater pricing volatility. Also, National has under-invested in its facilities, which will require increased capital spending on behalf of U.S. Steel. Given the recent decline in steel prices, these expenditures will likely challenge the company's ability to generate free cash in the intermediate term. U.S. Steel is also seeking consolidation opportunities in central Europe, which could further affect the company's financial profile.

The transaction is targeted for completion early in the second quarter of 2003 but is contingent on the successful negotiation of a new labor contract with the United Steelworkers of America, the approval of the bankruptcy court, and other customary regulatory approvals. In completing its review, Standard & Poor's will monitor steel industry fundamentals and assess the impact of the acquisition as well as additional potential acquisitions on the company's financial profile.

Ratings List: U.S. Steel
Corporate credit rating BB
Senior unsecured debt BB
Preliminary senior unsecured debt BB
Preliminary subordinated debt B+
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