Fitch Ratings – New York – 20 May 2020: Fitch Ratings has affirmed Unites States Steel Corporation’s Long-Term Issuer Default Rating (IDR) at ‘B-‘. The Rating Outlook remains Negative. Fitch has also affirmed the asset-backed loan (ABL) credit facility at ‘BB-‘/’RR1’ and downgraded the senior unsecured notes to ‘CCC’/’RR6’ from ‘B-‘/’RR4’. Additionally, Fitch has assigned the new first lien secured notes a ‘BB-‘/’RR1’ rating. The downgrade of the unsecured notes is due to the issuance of up to roughly $700 million of secured debt which receives priority in the recovery waterfall.

The ratings reflect Fitch’s expectation that key steel end markets, particularly automotive and energy will be materially weaker in 2020 in addition to the uncertainty associated with the coronavirus global pandemic’s longer term impact on the economy. In response to the coronavirus pandemic, U. S. Steel announced a number of strategic decisions including the decision to idle a number of facilities, draw an additional $800 million under its ABL credit facility and to defer capex. Additionally, the company is looking to issue up to $700 million of secured notes to further supplement its liquidity position. Although Fitch views the decisions as prudent to preserve liquidity, the significant reduction in earnings, increase in debt and uncertain timing of an economic recovery results in expectations that total debt/EBITDA will be highly elevated in the near term to medium term.

The Negative Outlook reflects the uncertain ultimate economic impact of the coronavirus pandemic, the uncertain timing and magnitude of a recovery in the economy leading to the possibility that total debt/EBITDA will be sustained above 7.5x. Fitch views U. S. Steel’s elevated financial leverage as partially offset by its significant liquidity position.

KEY RATING DRIVERS

Operational Footprint Decisions: In December 2019, U. S. Steel announced its intention to indefinitely idle a significant portion of its iron and steelmaking facilities at Great Lakes Works. In response to coronavirus developments, U. S. Steel recently announced it will idle the #4 blast furnace at Gary Works immediately and expects the furnace to remain idled until market conditions improve. U. S. Steel also announced it will temporarily idle the blast furnace “A” at Granite City Works. Fitch believes shipments could be more than 30% lower in 2020 due to operational footprint decisions in combination with the erosion of demand due to the coronavirus.

Oil Price Collapse: Declining demand in addition to Saudi Arabia’s intention to increase production led to a sharp significant drop in oil prices and rig count in 1Q20. In response to weak tubular demand, U. S. Steel intends to idle all or most of its Lone Star Tubular operations and Lorain Tubular operations beginning in late-May for an indefinite period of time. Operational tubular capacity is expected be primarily represented by Fairfield tubular operations, which has annual capacity of approximately 750,000 tons and will benefit from completion of the Fairfield EAF. However, Fitch expects tubular operations will be loss making over the next few years and believes it may be a significant amount of time before Lone Star and Lorain operations are restarted barring an oil price recovery.

Auto and Energy Exposure: Approximately 30% of North American shipments in 2019 were to automotive, transportation and energy markets. Additionally, roughly 20% of USSE shipments were to automotive and transportation markets. Fitch believes these markets represent some of the most negatively impacted markets by the coronavirus. Fitch expects weaker market conditions to lead to significantly lower EBITDA in 2020. The timing and magnitude of a recovery in demand is currently highly uncertain leading to the possibility EBITDA may be depressed beyond 2020.

Elevated Leverage: As of Dec. 31, 2019, U. S. Steel had outstanding borrowings of $600 million under its credit facility drawn to fund its acquisition of a 49.9% stake in Big River Steel. As a precautionary measure due in response to the coronavirus developments, U. S. Steel increased its borrowings under its credit facility by $800 million in 1Q20 in order to increase its cash position and preserve financial flexibility. Total debt/EBITDA was 7.4x as of Dec. 31, 2019, driven by increased borrowings and significantly weaker profitability.

Fitch expects leverage to increase significantly in 2020 driven primarily by the recent decision to raise up to an additional $700 million of debt, the coronavirus impact on the economy and decisions taken to idle capacity. Fitch expects leverage to improve thereafter with a rebound in the economy although the timing and magnitude of a recovery currently remains uncertain. Fitch views the company’s decision to raise additional debt resulting in further elevated leverage as partially offset by improved liquidity in the currently uncertain economic environment.

Project Spending Deferral: Weak market conditions in Europe led to the announcement in 4Q19 to delay Dynamo line spending. U. S. Steel also plans to delay construction of its endless casting and rolling line and cogeneration facility at its Mon Valley Works. Fitch views the decision to prioritize cash and liquidity as prudent in the currently volatile market environment. However, postponed projects were focused on improving the company’s cost position and therefore previously expected benefits from these investments are now also delayed in what may be a challenging steel price environment.

Iron Ore Asset Monetization: U. S. Steel granted Stelco Inc. a $100 million option to acquire a 25% interest in its Minntac iron ore mining operations for an aggregate purchase price of $600 million. Under the agreement, Stelco paid $20 million to U. S. Steel immediately, and the remaining $80 million will be paid ratably over the remaining 2020 calendar year. Stelco will then have the ability to exercise its option any time before Jan. 31, 2027 to acquire a 25% interest for an additional $500 million. The transaction provides the potential to further improve liquidity and fits the company’s reduced footprint following its indefinite idling of Great Lakes Works.

Negative FCF Expectations: Fitch expects domestic and European steel markets to be significantly weaker in 2020 compared with 2019 driven by demand erosion in key steel end markets due to the coronavirus. Despite decisions to delay capital spending on strategic projects, Fitch expects cash burn of approximately $600 million annually on average through the ratings horizon. Fitch views U. S. Steel’s significant liquidity position, minimal required pension contributions and no maturities over the next few years as partially offsetting expectations for negative FCF.

DERIVATION SUMMARY

U. S. Steel is larger in terms of annual shipments compared with EAF steel producer Commercial Metals Company (BB+/Stable) and smaller and less diversified than majority EAF producer Gerdau S.A. (BBB-/Stable) and global diversified steel producer ArcelorMittal S.A. (BB+/Negative). U. S. Steel has higher product and end-market diversification compared with CMC, although CMC has favorable leverage metrics and its profitability is less volatile resulting in more stable margins and leverage metrics through the cycle. U. S. Steel is larger in terms of total shipments, although is less profitable and has weaker credit metrics compared with EAF producer Steel Dynamics (BBB/Stable). U. S. Steel is also smaller and has weaker credit metrics compared with domestic EAF producer Nucor.

KEY ASSUMPTIONS

Fitch’s Key Assumptions Within Our Rating Case for the Issuer

–Flat-rolled steel prices decline significantly and bottom in 2020 before improving with a rebound in the economy;

–Great Lakes Works remains idle through the ratings horizon, Granite City Works furnace “A” remains idle until 2022 and one USSK furnace remains idle through the forecast period;

–Flat-rolled shipments decline significantly to roughly seven million tons in 2020, improve to slightly less than nine million tons in 2021 and improve to roughly 10.5 million tons per year thereafter;

–USSK Dynamo line project spending is delayed beyond the ratings horizon and only modest spending on the endless casting and rolling investment at Mon Valley Works.

The recovery analysis assumes U. S. Steel would be reorganized as a going concern in a bankruptcy rather than liquidated.

Assumptions for the going concern (GC) approach: Fitch has assumed a bankruptcy scenario exit GC EBITDA of $650 million. The GC EBITDA estimate is reflective of a mid-cycle sustainable EBITDA level upon which we base the enterprise valuation. The $650 million GC EBITDA estimate compares with 2018 operating EBITDA of approximately $1.5 billion and 2016 operating EBITDA of approximately $400 million, which represent domestic steel market high and low points respectively. The GC EBITDA estimate is weighted toward the lower end of the mid-point to reflect the volatility of prices and the cyclical end market demand in addition to Fitch’s view that the company could potentially exit a hypothetical bankruptcy scenario with a smaller operational footprint.

Fitch generally applies EBITDA multiples that range from 4.0x-6.0x for metals and mining issuers given the cyclical nature of commodity prices. Fitch applied a 5.0x multiple to the GC EBITDA estimate to calculate a post-reorganization enterprise value of $2.925 billion after an assumed 10% administrative claim. Fitch assumed the ABL credit facility is 80% drawn in the recovery analysis.

The allocation of value in the liability waterfall results in a Recovery Rating of ‘RR1’ for the first lien secured ABL credit facility and first lien secured notes resulting in a ‘BB-‘ rating and a Recovery Rating of ‘RR6’ for the senior unsecured level resulting in a ‘CCC’ rating.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

–Total debt/EBITDA sustained below 5.0x;

–EBITDA margins sustained above 6%.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

–Total debt/EBITDA sustained above 7.5x;

–FFO Fixed Charge Coverage Ratio sustained below 2.0x;

–A material weakening of domestic steel market conditions leading to significantly larger than expected negative FCF.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings.

LIQUIDITY AND DEBT STRUCTURE

Satisfactory Liquidity: As of March 31, 2020, U. S. Steel has cash and cash equivalents of $1.35 billion and $300 million available under its $2.0 billion ABL credit facility. U. S. Steel also had $152 million available under its USSK credit facilities and $13 million under its USS-POSCO Industries (UPI) credit facility. U. S. Steel must maintain a fixed charge coverage ratio of at least 1.0x when availability under the ABL credit facility is less than the greater of a) 10% of aggregate commitments and b) $200 million.

The USSK credit facility is also subject to covenants, measured semi-annually at June and December each year for the period covering the last 12 calendar months, with the first net debt/EBITDA measurement occurring at June 2021. USSK must maintain a net debt/EBITDA ratio of less than 6.5x as of June 30, 2021 and less than 3.5x for semi-annual measurements starting Dec. 31, 2021. U. S. Steel believes, if challenging marker conditions persist in Europe and negatively impact USSK’s projected EBITDA, and if covenant compliance requirements are not amended or waived, it may result in an event of default, under which USSK may not draw upon the facility. Additionally, the majority lenders, as defined in the USSK credit agreement, may cancel any and all commitments and/or accelerate full repayment of any or all amounts outstanding under the USSK credit agreement.