TEXT-S&P revises United States Steel outlook to negative
June 29 - Overview -- Industry conditions remain difficult for steel sheet producers as excess capacity and imports have pressured prices and demand has been uneven. -- We are revising the outlook on U.S. Steel to negative from stable and affirming the ratings on the company, including the 'BB' corporate credit rating. -- The negative outlook reflects our assessment that deteriorating prices could result in lower-than-expected operating performance and weaker credit metrics than we expect for the rating. Rating Action On June 29, 2012, Standard & Poor's Ratings Services revised the outlook on Pittsburgh-based United States Steel Corp. to negative from stable. At the same, time we affirmed the 'BB' corporate credit rating on the company, as well as the 'BB' issue level rating (the same as the corporate credit rating) and our '3' recovery rating on the company's senior unsecured notes. The '3' recovery rating indicates our expectation of a meaningful (50% to 70%) recovery in the event of a default. Rationale The rating outlook revision reflects our view that the company's operating performance in 2012 and 2013 could fall short of our expectations because of deteriorating pricing as a result of excess domestic supply, increased imports, and lower scrap prices. The rating on U.S. Steel reflects what Standard & Poor's considers to be the combination of its "fair" business risk and "aggressive" financial risk. In our view, the integrated steel producer has capital-intensive operations, is exposed to highly cyclical and competitive markets, and has a high degree of operating leverage. Its financial risk profile reflects relatively high levels of book debt and significant underfunded postretirement benefit obligations. Our ratings on the company also reflect its "strong" liquidity, good scope and breadth of product and operations, and the benefits of its backward integration into iron ore and coke production. Domestic steel demand and prices have fluctuated significantly over the past few years. But, overall, U.S. Steel's financial performance has gradually improved and credit metrics have trended closer to our expectations for the rating because of better auto production and solid demand for oil country tubular goods. As of March 31, 2012, debt to EBITDA improved to 4.7x and funds from operations (FFO) to total debt improved to 18%. (We adjust these measures for post retirement obligations, operating leases, and asset retirement obligations.) However, we expect them to weaken in the next few quarters as sheet pricing seems to be following a similar pattern to the past couple of years and weakening at midyear. We now expect 2012 EBITDA will fall below the $1.7 billion to $1.9 billion we had anticipated at the beginning of the year and may be closer to last year's $1.3 billion, with credit metrics weaker than what we consider appropriate for the 'BB' rating. If prices don't firm, debt to EBITDA in 2012 could approach 6x and FFO to total debt could fall to 10% compared with the our expectations for the rating of debt to EBITDA of about 4.5x and FFO to debt of about 20%. In our view, conditions should improve somewhat in 2013, reflecting our expectation for continued slow growth in the U.S. economy. However, if persistent domestic overcapacity because of slower-than-expected U.S. economic growth, economic uncertainty in Europe, and slowing steel usage in China continue to pressure pricing and margins and erode liquidity, we could lower the ratings. U.S. Steel is a relatively large player in the highly fragmented global steel market. It has about 24 million tons of steel capacity in North America and about 5 million tons of capacity at its operations in the Slovak Republic. U.S. Steel is also the only integrated steel company in North America that is primarily self-sufficient in producing iron ore and produces and has long-term contracts for a majority of its coke needs, which has somewhat limited its exposure to recent rapid increases in procurement costs. It also has a diverse product mix that is mostly value added. It's a leading domestic producer of tubular products (for the oil and gas industry) and tin and other coated-steel products. However, it is significantly exposed to the volatile flat-rolled market, with spot sales accounting for about half of its total shipments. Liquidity In our view, U.S. Steel's liquidity is strong. Relevant aspects of our assessment of the company's liquidity profile include: -- We expect sources of liquidity to exceed uses by 1.5x or more for the next couple of years; -- The company is likely to be able to absorb high-impact, low probability events without refinancing; and -- The company's maturities are manageable--the next significant maturity is for its $863 million senior convertible notes in 2014. As of March 31, 2012, the company had about $2.5 billion in available liquidity, including $652 million in balance-sheet cash and full availability on its $875 million revolving credit facility due 2016, which is secured by inventory. The facility has a springing fixed-charge covenant of 1x if availability falls to less than $87.5 million. U.S. Steel also has the full amount available under its $625 million accounts receivable securitization program that expires in 2014 and about $373 million available on European credit lines. For the 12 months ended March 31, 2012, U.S. Steel's adjusted free cash flow was $1.2 billion after capital spending of about $840 million, and it was using about $190 million in cash for working capital. We expect capital expenditures at similar levels for the rest of the year as the company continues to invest in strategic projects, including construction of new coke and coke substitute production facilities and upgrades to its tubular business. As a result, we expect the company to be marginally free cash flow negative in 2012. We do not expect the company to significantly increase its dividend, which it reduced to $0.05 per share from $0.30 per share, or to repurchase shares in the coming months, given still relatively weak operating conditions and credit measures. Recovery analysis For the complete recovery analysis, see our recovery report on U.S. Steel, published April 2, 2012, on RatingsDirect. Outlook The negative rating outlook reflects our expectation that U.S. Steel's financial risk profile and credit measures are unlikely to improve to levels we consider more in line with the rating in the coming quarters. In our view, if conditions continue to be weak in the second half of the year, U.S. Steel may only generate about $1.3 billion of EBITDA in 2012, with credit metrics below our expectation for the rating. We expect improvement in 2013 based on our expectation for continued slow economic growth and relative strength in the company's key end markets. But slower-than-expected U.S. growth, eurozone woes, and slowing economic growth in China could pressure demand and pricing and keep metrics weak. The rating also reflects our view of the company's strong liquidity, which should be sufficient to fund increased working capital needs as business expands and as capital spending remains high to fund strategic projects. We could lower the rating if market conditions do not improve or if global economic and political uncertainty throws the economy into recession or causes weak industry conditions, resulting in the company's liquidity falling below $1 billion as it uses its available funds to cover operating losses. In this scenario, we envision credit metrics remaining weaker than our expectations for the rating. An upgrade would be contingent on a sustained improvement in market conditions, allowing the company to improve its debt to EBITDA to less than 3x and FFO to total debt to more than 30% on a sustained basis. We do not view this scenario to be likely over the next 12 months. Related Criteria And Research -- Key Credit Factors: Methodology And Assumptions On Risks In The Metals Industry, June 22, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action To From United States Steel Corp. Corporate Credit Rating BB/Negative/-- BB/Stable/-- Ratings Affirmed United States Steel Corp. Senior Unsecured BB Recovery Rating 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
- Tweet this
- Share this
- Digg this