U.S. Steel Corp. Rating Lowered To 'B-' On Weaker Cash Flow; Outlook Negative

  • Sharply weaker market conditions for steel in the U.S. and Europe will hit U.S. Steel Corp.'s volumes and earnings in 2020 as it continues with large capital outlays on strategically important projects.
  • Adjusted leverage will likely remain well above our 5x threshold for a lower rating again in 2020 because of sharply lower demand from the compounding effects of the oil and gas slowdown, the COVID-19 pandemic, and already weaker volumes in the auto sector.
  • The company could rely on its revolver for major capital expenditures (capex) in 2021 if it depletes cash as we forecast in 2020.
  • We are lowering our ratings on U.S. Steel and its senior unsecured debt to 'B-' from 'B'.
  • The negative outlook reflects the company's reliance on improved market conditions to stabilize its cash burn during the buildout of the Mon Valley casting and rolling project.
TORONTO (S&P Global Ratings) March 26, 2020--S&P Global Ratings today took the rating actions listed above.
U.S. Steel closed out 2019 with adjusted debt to EBITDA of about 10x because of deteriorating market conditions and higher debt, about 6x if we exclude about $275 million of fourth-quarter restructuring charges. Steel markets have since weakened, and credit conditions are markedly more difficult as the company is increasingly likely to require external funding in the next 12-18 months. It can scale back capex to preserve cash during this period of poor visibility, but this would only defer much needed strategic investments that could reduce operating costs and improve its competitive position.
The negative outlook reflects the risks that deteriorating cash flow could increase the need for external funding amid difficult conditions in capital markets.
We could lower the rating unless U.S. Steel reduces its free operating cash drain in 2020, which we believe will tighten liquidity in 2021 with about a year of major capital spending remaining. We believe such a scenario would be characterized by persistently high leverage above 6x and questionable access to capital markets.
We could revise the outlook to stable if the company preserves adequate liquidity as it nears completion of its significant Mon Valley investments amid better market conditions. In such a scenario, we expect adjusted debt to EBITDA would return below 5x and any free cash drain could be addressed internally or with better access to capital markets. We estimate this could occur with a rebound in hot-rolled coil steel prices to about $625 per ton in 2021 and higher volumes because of an improving economy.
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