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U.S. Steel's finances cause concern in credit markets

| Friday, Oct. 28, 2011

U.S. Steel Corp., the steelmaker created at the turn of the 20th century by Andrew Carnegie and J.P. Morgan that became America's first $1 billion company, is sliding deeper into junk territory in the eyes of the bond market.

Credit-default swaps on the Pittsburgh-based steelmaker have climbed to levels implying it should be rated B3 by Moody's Investors Service instead of its current Ba3, according to Moody's Corp.'s capital markets group. Bonds in the B category are subject to "high credit risk," according to the ratings company.

U.S. Steel posted an operating loss of $50 million in Europe for the third quarter, double its deficit from a year earlier, when it reported results on Tuesday. The company expects a worse fourth quarter in Europe and its North American flat-rolled unit "as a result of the slow and uneven economic recovery in those regions." The "deeply cyclical" steelmaker is struggling at a time of flagging economic growth, money manager Bonnie Baha said.

"The company has sufficient liquidity to fund their cash needs until their operating results improve, as long as they don't wait too long," said Baha, head of global developed credit group at DoubleLine Capital LP in Los Angeles, which has $18 billion in assets under management.

Erin DiPietro, a spokeswoman for the company, declined to comment on U.S. Steel's credit ratings.

U.S. Steel shares had tumbled 58 percent this year before it reported third-quarter earnings. They have risen since then to $24.97 yesterday.

"People are losing faith in the industrial recovery," said John Stephenson, a portfolio manager at First Asset Investment Management Inc. in Toronto. Climbing credit-default swaps and declining share prices are "essentially two markets telling you at the same time this is very negative."

U.S. Steel's perceived credit rating has slid in the eyes of swap traders, according to Moody's. The contracts, which typically rise as investor confidence deteriorates, climbed to 15.3 percent upfront Wednesday, according to data provider CMA. That's in addition to 5 percent a year, meaning it would cost $1.53 million initially and $500,000 annually to protect $10 million of U.S. Steel's debt.

The ratings company downgraded the steelmaker from Ba2 on Oct. 24, as the European debt crisis damped the global economic recovery.

"The company is doing what it can to deal with all these things going on in the market, but it's really the macroeconomics" causing volatility in prices, consumer confidence, and purchasing behavior, Carol Cowan, a Moody's analyst, said. "There's not much one can do about that."

U.S. Steel had $8 billion of long-term borrowings on Sept. 30, according to data compiled by Bloomberg. Its next maturities are $300 million of 5.65 percent bonds in June 2013, and $863 million of 4 percent bonds due May 2014, Bloomberg data show.

U.S. Steel must repay or refinance $196 million of environmental revenue bonds by year end, and has gotten the required approval from the eight municipal authorities to issue tax-exempt bonds, Chief Financial Officer Gretchen Haggerty said on a conference call this week.

"Results will continue to get worse before they get better," Kip Penniman, a credit analyst with KDP Investment Advisors in Montpelier, Vt., wrote in a note predicting negative cash flow of $482 million for U.S. Steel this year. The company will finance that deficit "with available cash and higher debt levels."

Fitch Ratings cut the outlook on its BB grade for the company to "negative" from "stable" on Wednesday, saying that "further weakness in the domestic and European steel markets" will continue next year. Bond researcher Gimme Credit LLC cut its rating yesterday to "underperform" from "outperform," citing a "difficult" next few quarters.

U.S. Steel, led by CEO John Surma, had $270 million in cash and near cash items on Sept. 30, down from $393 million on June 30 and $643 million at the end of the third quarter last year.

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