Arkansas Development Finance Authority — Moody’s upgrades United States Steel’s CFR to Ba3; outlook stable

Rating Action: Moody’s upgrades United States Steel’s CFR to Ba3; outlook stableGlobal Credit Research – 09 Dec 2021New York, December 09, 2021 — Moody’s Investors Service (« Moody’s ») upgraded United States Steel Corporation’s (« U. S. Steel ») Corporate Family rating to Ba3 from B1, its Probability of Default rating to Ba3-PD from B1-PD, its senior unsecured debt rating to B1 from B3, its senior unsecured shelf rating to (P)B1 from (P)B3, and Big River Steel LLC’s (« Big River Steel ») secured debt rating to Ba2 from Ba3.The ratings outlooks for U. S. Steel and Big River Steel remains stable. U. S. Steel’s Speculative Grade Liquidity Rating was changed to SGL-1 from SGL-2.Upgrades:..Issuer: United States Steel Corporation…. Corporate Family Rating, Upgraded to Ba3 from B1…. Probability of Default Rating, Upgraded to Ba3-PD from B1-PD…. Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2….Senior Unsecured Shelf, Upgraded to (P)B1 from (P)B3….Senior Unsecured Conv./Exch. Bond/Debenture, Upgraded to B1 (LGD5) from B3 (LGD5)….Senior Unsecured Regular Bond/Debenture, Upgraded to B1 (LGD5) from B3 (LGD5)..Issuer: Allegheny County Industrial Dev. Auth., PA….Senior Unsecured Revenue Bonds, Upgraded to B1 (LGD5) from B3 (LGD5)..Issuer: Bucks County Industrial Development Auth., PA….Senior Unsecured Revenue Bonds, Upgraded to B1 (LGD5) from B3 (LGD5)..Issuer: Hoover (City of) AL, Industrial Devel. Board….Senior Unsecured Revenue Bonds, Upgraded to B1 (LGD5) from B3 (LGD5)..Issuer: Indiana Finance Authority….Senior Unsecured Revenue Bonds, Upgraded to B1 (LGD5) from B3 (LGD5)..Issuer: Ohio Water Development Authority….Senior Unsecured Revenue Bonds, Upgraded to B1 (LGD5) from B3 (LGD5)..Issuer: Southwestern Illinois Development Authority….Senior Unsecured Revenue Bonds, Upgraded to B1 (LGD5) from B3 (LGD5)..Issuer: Big River Steel LLC….Senior Secured Regular Bond/Debenture, Upgraded to Ba2 (LGD2) from Ba3 (LGD3)..Issuer: ARKANSAS DEVELOPMENT FINANCE AUTHORITY….Senior Secured Revenue Bonds, Upgraded to Ba2 (LGD2) from Ba3 (LGD3)Outlook Actions:..Issuer: United States Steel Corporation….Outlook, Remains Stable..Issuer: Big River Steel LLC….Outlook, Remains StableRATINGS RATIONALEU. S. Steel’s Ba3 corporate family rating reflects its inconsistent historical operating performance due to its exposure to cyclical end markets and volatile steel prices, and its inconsistent free cash flow which will continue to be impacted by elevated capital investments. The rating also incorporates the company’s large scale and strong market position as a leading US flat-rolled steel producer and whose footprint is further enhanced by its diversification in Central Europe, as well as our expectation for moderate financial leverage and ample interest coverage in a normalized steel price environment due to significant debt reduction in 2021. It also considers our expectation for an historically strong operating performance through 2022 that will result in near term metrics that are strong for the rating, but are not likely sustainable as steel prices return to a more normalized level as supply and demand come into balance.U. S. Steel’s operating results have materially strengthened in 2021 and we anticipate it will generate adjusted EBITDA of about $6.0 billion due to a quicker than anticipated recovery in its key end markets, with the exception of the oil & gas sector, along with the addition of Big River Steel and a surge in steel prices. Its U. S. Steel Europe segment will also benefit from the same improved fundamentals as its domestic operations. Domestic steel prices surged in 2021 with hot rolled coil prices (HRC) hitting a record high of about $1,960 per ton in November 2021 after declining to a 4.5-year low around $440 per ton in July 2020 due to the effects of the pandemic. The price surge has been attributable to industry consolidation, a temporary dislocation of supply and demand, the replenishment of steel inventories and elevated raw material prices.U. S. Steel has taken advantage of the favorable steel sector dynamics and accommodative capital markets and has used its strong free cash flow along with the proceeds from debt and equity offerings and asset sales to materially reduce its outstanding debt, significantly lower its interest costs and to push out its debt maturities. We anticipate further debt reduction in Q4 which will result in about a $3 billion pay down of its outstanding debt in 2021 including the debt assumed from the Big River Steel acquisition. Further debt reduction is unlikely considering the company’s extended debt maturity profile and its lack of near-term callable debt, as well as its plans to add a new 3-million-ton EAF mill for about $3 billion, new coating capabilities ($280 million) and a non-grain oriented electrical steel line ($450 million) at Big River Steel and since it recently announced a new $300 million share repurchase program and raised its quarterly dividend.If U. S. Steel can produce adjusted EBITDA of $6.0 billion and retires additional debt in Q4, then its leverage ratio (debt/EBITDA) will be less than 1.0x and its interest coverage (EBIT/Interest) above 10.0x. These metrics will be strong for the Ba3 corporate family rating, but are expected to return to a level more commensurate with its rating when steel prices and metal spreads decline towards more normalized historical levels. We anticipate that demand will somewhat ebb as inventories are replenished and supply will continue to ramp up as new capacity comes online, and imports rise due to the wide spreads between domestic and overseas prices and the possibility of further tariff rate quota agreements like the recent deal with the European Union. This will cause prices to gradually decline, but anticipate they will settle above the 10-year average price range of about $600 – $700 per ton and that metal spreads will remain historically wide due to sector consolidation and decarbonization initiatives.U. S. Steel has a speculative grade liquidity rating of SGL-1 since it is expected to maintain very good liquidity. It had $2.0 billion of unrestricted cash and borrowing availability of $1.746 billion on its $1.75 billion asset based revolving credit facility as of September 30, 2021. The company amended this facility in July 2021 and reduced its size to $1.75 billion from $2.0 billion but maintained the maturity date of October 2024. The facility had no borrowings outstanding and $4 million of letters of credit issued. The facility requires the company to maintain a fixed charge coverage ratio of 1.0x should availability be less than the greater of 10% of the total aggregate commitment and $175 million.The company also has a $350 million undrawn revolver at Big River Steel and an undrawn Euro 300 million ($347 million equivalent on September 30, 2021) unsecured credit facility at its U. S. Steel Kosice (USSK) subsidiary in Europe, both with a maturity date in 2026.Big River Steel’s secured debt is rated one notch above U. S. Steel’s CFR due to its priority position in the consolidated capital structure and the benefit of U. S. Steel redeeming all its secured notes and issuing additional unsecured debt in 2021, which enhances the loss absorbing buffer below the secured debt. The B1 ratings on U. S. Steel’s convertible notes, senior unsecured notes and IRB’s reflects their effective subordination to the secured ABL, secured notes and bonds as well as priority payables.The stable ratings outlook incorporates our expectation for an historically strong operating performance through 2022 that will result in credit metrics that are strong for the company’s rating, but that its credit metrics will return to a level more commensurate with its rating when steel prices and metal spreads decline towards more normalized historical levels.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSU. S. Steel’s ratings could be considered for an upgrade if steel prices and metal spreads are sustained above historical averages, the strategic benefits of the « Best for All » strategy is achieved and the company demonstrates a clearly defined and more conservative financial policy and pursues further debt reduction. Quantitatively, if U. S. Steel can sustain leverage of no more than 3.0x through varying steel price points and its CFO less dividends is in excess of 30% of its outstanding debt, then its ratings could be positively impacted.The company’s ratings could be downgraded should steel sector conditions materially deteriorate such that its leverage ratio is sustained above 4.0x, its CFO less dividends falls below 15% of its outstanding debt, or it fails to maintain a strong liquidity profile.Headquartered in Pittsburgh, Pennsylvania, United States Steel Corporation is the third largest flat-rolled steel producer in the US in terms of production capacity. The company manufactures and sells a wide variety of steel sheet, tubular and tin products across a broad array of industries including service centers, transportation, appliance, construction, containers, and oil, gas and petrochemicals. It also has an integrated steel plant and coke production facilities in Slovakia (U. S. Steel Kosice).Revenues for the twelve months ended September 30, 2021 were $17.2 billion.The principal methodology used in these ratings was Steel published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1296098. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Michael Corelli, CFA Senior Vice President Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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