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Moody's downgrades US Steel deeper into junk

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Moody's downgrades US Steel deeper into junk

Moody's on May 2 cut U.S.Steel Corp.'s corporate family rating further into junk territory, toB3 from B1, due in part to deteriorating conditions in the North American steelsector, especially for producers in the flat-rolled and tubular markets.

Moody's also lowered the company's probability of default ratingto B3-PD, from B1-PD, alongside downgrading its senior unsecured notes to Caa1 fromB2.

The changes reflected the view that the steel group's greaterleverage, low interest coverage and weak operating margins made its debt a riskierinvestment.

"The rating also reflects our expectation that the steeland oil & gas industry fundamentals will remain weak and volatile in the nearterm and weigh on U.S. Steel's operating performance," the Moody's statementread.

U.S. Steel had net debt outstanding of about US$2.42 billionas of March 31 this year, according to SNL Metals & Mining data.

The agency also said that although some of the markets that thecompany operates in have improved in recent weeks, it did not expect these marketrallies to last.

"Although prices for hot-rolled coil have moved up materiallyin recent weeks and import levels have slowed, we believe that some of the improvementis not sustainable and the second half of 2016 could see some slippage."

U.S. Steel also had high fixed costs, and was highly exposedto the market for pipes and tubes used in oil and gas exploration, a sector thathas followed the price of crude oil down.

The company will need to deliver annual EBITDA of at least US$950million in order to qualify for a ratings upgrade, Moody's said.

On the positive side, Moody's also noted the company's geographicdiversification in Europe, where it owns U.S. Steel Kosice, the largest CentralEuropean integrated steelmaker, as well as its overall high level of liquidity.

The company held US$705 million in cash and equivalents at theend of the first quarter, according to SNL data.

SNL Metals & Mining is an offering of S&P Global MarketIntelligence.