NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the Issuer Default Rating (IDR) of United States Steel Corporation (U.S. Steel; NYSE: X) to 'BB' from 'BB+'. A full list of rating actions is at the end of this press release.
The Rating Outlook is Stable.
The ratings have been downgraded as a result of higher than expected cash burn in 2010 and the possibility of a prolonged period of higher financial leverage. Fitch believes that free cash flow could be negative in the range of $500 million for 2011 following negative free cash flow of $1 billion in 2010 and $736 million (after of $147 million of capital expenditures by variable interest entities) in 2009. While management has a high degree of control over its raw materials, the company has a large fixed cost base and capacity utilization in North America has been less than 80%, thereby pressuring earnings and cash flow. There is no visibility into when capacity utilization in the region will show material improvement.
The ratings reflect solid liquidity, weak but slowly improving market conditions, and weak earnings and cash flow. Fitch believes that U.S. Steel will revert to an average annual EBITDA of $2 billion but that it may take as long as 2012 or 2013 to realize.
The Stable Outlook reflects Fitch's view that U.S. Steel's liquidity is sufficient to support operations should the recovery remain weak for the next 12-18 months.
Operating EBITDA is expected to be about $1.5 billion for the year compared with $520 million for 2010 and a loss of $1.1 billion for 2009. Debt at March 31, 2011 was $3.8 billion. On a GAAP basis, pensions benefit obligations exceeded the fair value of pension plan assets by $1.975 billion at Dec. 31, 2010 and U.S. Steel voluntarily contributed $140 million per year to the main defined pension plan over each of the past five years.
Liquidity is solid with cash on hand at quarter-end at $421 million; the $750 million revolver available up to the amount above which the fixed charges coverage ratio requirement is applicable ($637.5 million) and the $525 million accounts receivable facility was fully available. The revolver expires May 11, 2012, and the receivables facility expires July 19, 2013. The revolver has a 1.10:1.00 fixed charges coverage ratio requirement only at such times as availability under the facility is less $112.5 million.
As of December 31, 2010, scheduled maturities of debt were $216 million in 2011 and $20 million in 2012, and $300 million in 2013, $863 million in 2014, and $150 million in 2015. In 2011, $196 million of the maturities relate to environmental revenue bonds which the company agreed to refinance related to its separation from Marathon Oil Corporation. The $863 million due in 2014 is an in-the-money convertible issue. Capital expenditure guidance for 2011 was $990 million. Fitch expects interest expense in the range of $230 million to $240 million.
A review of the ratings and Outlook would be warranted should liquidity deteriorate beyond current expectations or if results are much weaker than expected.
Fitch has downgraded the following ratings:
--Long-term IDR to 'BB' from 'BB+';
--Senior secured credit facility to 'BB+' from 'BBB-'; and
--Senior unsecured notes at to 'BB' from 'BB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology