Fitch Affirms U.S. Steel's IDR at 'BB-'; No Impact from U.S. Steel Canada Filing

Fitch Ratings has affirmed United States Steel Corporation's (U.S. Steel; NYSE:X) Issuer Default Rating (IDR) and debt ratings at 'BB-'. A full list of rating actions follows at the end of this release.

The Rating Outlook is Stable.

On Sept. 16, 2014, U.S. Steel Canada Inc., an indirect wholly owned subsidiary of U.S. Steel, applied for relief from its creditors under Canada's Companies' Creditors Arrangement Act. Another subsidiary of U.S. Steel has agreed to provide U.S. Steel Canada with a C$185 million secured DIP facility to allow the company to operate through Dec. 31, 2015 when the facility expires.

The filing is an event of default under the terms of the Province Note Loan Agreement dated as of March 31, 2006 covering U.S. Steel Canada notes in the aggregate principal amount of C$150 million. The terms provide that the Province note became immediately due and payable upon the filing. As a result of the filing, USSC will not be able to pay the amount due and payable on the Province note absent approval from the Court.

Failure to pay the Province note when due would constitute an event of default that enables the trustee for, or the holders of not less than 25% of the outstanding principal amount of, U.S. Steel's 2.75% senior convertible notes due 2019 in the aggregate principal amount of $316 million to declare the notes immediately due and payable. U.S. Steel has stated their intention to repay the notes in cash should they become due and payable. Neither the filing, nor the possible acceleration of the 2.75% notes triggers any other material defaults under any other U.S. Steel Canada or U.S. Steel financing arrangements.

U.S. Steel's cash on hand, excluding amounts at U.S. Steel Canada, was $1.3 billion at June 30, 2014 and the company is well able to fund the DIP and the 2.75% note redemption. Fitch believes that U.S. Steel would immediately pay the 2.75% notes should they be accelerated and that there will be no payment default.

The U.S. Steel Canada operations have been loss making over the past five years therefore, Fitch does not expect the filing to result in further stress on U.S. Steel.

KEY RATING DRIVERS:

The ratings reflect U.S. Steel's leading market positions in flat-rolled and tubular steel in the U.S., together with its high degree of control over its raw materials offset by the high fixed costs of integrated steel producers.

U.S. Steel is the second largest North American flat-rolled steel producer with annual raw steel production capacity of 19 million tons in the U.S. North American flat-rolled shipments were 15 million tons for 2013. U.S. Steel is the largest integrated North American tubular producer, with capacity of 2.8 million tons; 2013 shipments were 1.8 million tons. U.S. Steel also operates a five million ton per year integrated steel operation in Kosice, Slovakia.

U.S. Steel's production of iron ore pellets from its own operations was 21.7 million tons and from its share of joint ventures was 2.4 million tons in 2013, accounting for a significant share of its needs. In 2013, North American raw steel produced was 18 million tons and, assuming 1.3 tons of iron ore pellets are needed to produce 1 ton of raw steel, 23 million tons of iron ore pellets were consumed.

The U.S. steel industry is challenged by low capacity utilization (about 77% on average for 2013 and 76% on average year to date 2014). Permanent closure at U.S. Steel's Hamilton's raw steelmaking operations and at the former RG Steel LLC plants should improve capacity utilization as should growth in construction demand. Fitch believes that margins are vulnerable when capacity utilization is below 80% and that capacity utilization could remain below 80% through 2014.

The domestic steel market has shown supply discipline, but global overcapacity and lack of discipline elsewhere has limited pricing power while bidding up raw material prices. Globally, increased supply of iron ore and coking coal coupled with slower growth in steel production has provided relief from raw materials escalation.

Adequate Liquidity:

U.S. Steel generated operating EBITDA of $863 million and $943 million of free cash flow after capital expenditures of $442 million and dividends of $30 million for the latest 12 months (LTM) ended June 30, 2014. Also as of June 30, 2014, pro forma for the deconsolidation, cash on hand was $1.3 billion; total debt was $3.5 billion; the $875 million inventory facility maturing July 20, 2016 and the $625 million receivables facility maturing July 12, 2016 were undrawn; the receivables facility was utilized for $50 million in letters of credit at June 30, 2014. The inventory facility has a 1.00:1.00 fixed-charge coverage ratio requirement only at such times as availability under the facility is less than $87.5 million.

Total liquidity of $3.2 billion at June 30, 2014 compares with 2014 guidance of capital expenditure at $620 million, cash pension and other benefits at $525 million, and Fitch estimated net financial costs at $250 million.

As of Dec. 31, 2013, defined benefit pension plans were underfunded by $1.1 billion on a GAAP basis. Pension and other post-employment benefit costs were $451 million for 2013 and cash payments were $473 million including the $140 million voluntary contribution to the main U.S. defined benefit pension plan. Costs guidance for 2014 is $345 million and cash payments are expected to be $525 million. The company has voluntarily contributed $140 million per year to the main defined pension plan over each of the past eight years.

Fitch expects EBITDA of at least $1 billion and free cash flow to be positive for 2014.

Fitch expects leverage to drop below 4x through 2014 with scheduled debt repayment and cost improvements. Estimated pro forma near-term scheduled maturities of debt are $62 million in 2015; $45 million in 2016; $500 million in 2017; and $503 million in 2018. The 2.75% convertible issue in the aggregate principal amount of $316 million is due in 2019 but could become due and payable immediately if accelerated. Total debt/operating EBITDA was 4.25x at June 30, 2014.

The Stable Outlook reflects Fitch's view that U.S. Steel's liquidity is sufficient to support operations should the recovery in steel demand remain weak over the next 12-18 months.

RATING SENSITIVITIES:

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Deterioration in liquidity coupled with cash burn greater than $300 million;

--Weaker than expected operating results resulting in total debt/EBITDA sustainably above 4.5x;

--A debt-financed recapitalization or debt-financed acquisition.

Fitch views these events as unlikely.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Sustained positive free cash flow generation and debt repayment.

Fitch affirms U.S. Steel's ratings as follows:

--Long-term IDR at 'BB-';

--Senior secured credit facility at 'BB';

--Senior unsecured notes at 'BB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology' dated May 28, 2014.

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=876374

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