Ratings agency Fitch Ratings has assigned a “BB+” rating to United States Steel Corporation’s (X) $500 million debt issued recently, reports AP. According to Fitch, “BB+” rated debt is non-investment grade or junk bond and is more vulnerable to changes in the economy. The company plans to use the proceeds from the notes due 2020 for general corporate purposes.
Fitch had earlier downgraded US Steel’s rating on similar debt to “BB+” from “BBB-“, citing a lack of visibility of both an economic recovery and the company’s return to profitability. The downgrade included the possibility that the company, one of the world’s largest steel producers, would need financing in the near term for part of its capital spending over the next two to three years.
However, Fitch’s rating outlook on US Steel is “stable”, reflecting the agency’s view that the company’s liquidity is sufficient to support operations, should the recovery remain weak for the next few months.
In contrast to Fitch’s downgrade, Moody’s Investor Services (MCO) has upgraded the ratings on US Steel’s senior unsecured notes, pollution control revenue bonds and convertible notes due 2014 to “Ba2” from “Ba3″. The agency seems to be more positive on US Steel’s capital structure changes, which now has a lower proportion of secured debt and administrative and priority claims in total liabilities. Moody’s judges obligations rated “Ba” to have questionable credit quality.
Moody’s has also affirmed the company’s “Ba2” corporate family rating and the probability of a default rating. The upgrade on the corporate family rating is driven by Moody’s expectation of an improvement in US Steel’s debt protection and leverage ratios this year, although it expects the ratios to continue to be relatively weak. The rating outlook remains “negative.”
Zacks Recommendation
US Steel’s debt-to-equity ratio has remained above 65% in the last three quarters. As of December 31, 2009, long-term debt totaled $3.35 billion. The company’s net cash position (total cash less long-term debt) as of December 31, 2009 was a deficit of a significant $2.13 billion or $15.8 per share.
Yet, the long-term positive outlook for steel makes us optimistic. We believe that US Steel is poised to show significant improvement in margins and profitability in the coming quarters. Raw material costs for steelmaking are rising, and US Steel is a leading beneficiary of this trend because of its integrated business model.
The company’s capacity utilization rates have improved faster than expected, following the recent restart of its blast furnaces. Of its 15 idled furnaces, 13 are now up and running. We believe that improving capacity utilization should return the company to profitability in 2010. Earning power will improve as utilization should near 70% in 2010. We reaffirm our Neutral recommendation on the stock.
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Read the full analyst report on “MCO”
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