Fitch Ratings has upgraded United States Steel Corporation's (U.S. Steel) Issuer Default Rating (IDR) to 'BB-' from 'B'.

The Rating Outlook is Positive. Fitch has also upgraded U. S. Steel's ABL credit facility to 'BB+'/'RR1' from 'BB'/'RR1' and upgraded the unsecured notes and unsecured environmental revenue bonds to 'BB-'/'RR4' from 'B'/'RR4'.

The upgrade reflects U. S. Steel's significant debt repayment over the near term, solid steel market conditions, including historically high steel prices, which result in significantly higher EBITDA generation and significantly lower leverage metrics.

The ratings also reflect U. S. Steel's shifting focus to lower-cost, more-efficient mini mills as evidenced by the acquisition of Big River Steel Holdings LLC and the company's announcement of its intention to build a new three million-ton mini mill.

The Positive Outlook reflects the possibility that total debt/EBITDA could be sustained below 2.5x and the new mini mill could be self-funded and constructed over the rating horizon.

Key Rating Drivers

Significant Debt Repayment: In 1Q21, U. S. Steel completed an equity offering for proceeds of approximately $790 million. The company used the equity proceeds, together with new $750 million unsecured notes, to redeem all of its $1.056 billion secured notes due 2025. Additionally, in 1Q21, U. S. Steel repaid the remaining $500 million drawn on its $2.0 billion ABL credit facility due 2024. The company then redeemed $718 million of its 6.875% notes due 2025 in 3Q21 and has redeemed $180 million of the 6.625% BRS secured notes due 2029 and $370 million of the U. S. Steel 6.25% notes due 2026.

Improved Leverage Expectations: Total debt/EBITDA was 2.9x at 2Q21 driven by significantly higher EBITDA generation and debt repayment. Fitch expects total debt/EBITDA to improve to below 2.0x by YE21 in line with solid steel market conditions, including historically high steel prices, the company's near-term focus on debt repayment and Fitch's expectation for approximately $4 billion of EBITDA in 2021. U. S. Steel's pro-forma debt outstanding debt at the time of BRS acquisition in January 2021 was approximately $7 billion. The company disclosed that it has repaid $2.7 billion of debt through Sept. 16, 2021.

Solid Steel Market Conditions: HRC prices have recovered dramatically to historical highs and are supported by solid supply/demand dynamics, low imports and relatively high raw material costs. In its flat-rolled segment, U. S. Steel's shipments and realized prices improved 30% and 50% respectively in 2Q21 compared with the low point over the past year in 2Q20. The significantly improved domestic steel environment has led to stronger-than-expected EBITDA generation and lower leverage. EBITDA in 1H21 was more than $1.7 billion, which compares with full-year 2018, a high point in the cycle, EBITDA of around $1.5 billion.

Big River Steel Acquisition: In October 2019, U. S. Steel acquired a 49.9% equity interest in Big River Steel Co. (BRS), an electric arc furnace (EAF) facility with 3.3 million tons of annual capacity, for approximately $700 million. In January 2021, U. S. Steel acquired the remaining equity interest in BRS for approximately $774 million. BRS's high EBITDA margins, driven by its flexible low-cost structure, should benefit U. S. Steel's overall cost position and operating profile, reducing earning volatility.

Additionally, U. S. Steel recently announced a new three million-ton mini mill, with construction expected to begin in 2022 and production to begin in 2024 with the current expected investment to be $3 billion. Fitch views U. S. Steel's strategy to shift to lower cost more efficient assets positively and believes it will improve and result in more stable margins through the cycle.

Asset Monetization: U. S. Steel granted Stelco Inc. a $100 million option to acquire a 25% interest in its Minntac iron ore mining operations for an aggregate purchase price of $600 million. Under the agreement, Stelco paid $100 million to U. S. Steel in 2020. Stelco will then have the ability to exercise its option any time before Jan. 31, 2027 to acquire a 25% interest for an additional $500 million. The transaction provides the potential to further improve liquidity and fits the company's reduced footprint following its indefinite idling of Great Lakes Works.

In addition, U. S. Steel sold its Keystone Industrial Port Complex, a non-core real estate asset, for approximately $163 million. Additionally, in 2Q21, U. S. Steel announced the sale of Transtar for $640 million in proceeds. The liquidity from asset sales provides further capacity for debt repayment.

Derivation Summary

U. S. Steel is similar in size compared with Cleveland-Cliffs (BB-/Positive) and has a comparable operating profile in that both companies are integrated and have both blast furnace and EAF production, but are primarily blast furnace producers. U. S. Steel is larger in terms of annual shipments compared with EAF steel producer Commercial Metals Company (BB+/Stable), has higher product and end-market diversification, although CMC's profitability is less volatile resulting in more stable margins and leverage metrics through the cycle. U. S. Steel is larger in terms of total shipments, although less profitable with weaker credit metrics historically through the cycle compared with EAF producer Steel Dynamics (BBB/Stable).

Key Assumptions

Fitch's Key Assumptions Within the Rating Case for the Issuer

Flat-rolled steel prices decline from historical highs through the ratings horizon;

Flat-rolled steel shipments of around 10 million tons in 2021 declining to around 9.5 million tons per year thereafter;

Mini Mill Segment shipments of around 2 million tons in 2021 gradually improving thereafter;

Capex around $800 million in 2021, increasing significantly in 2022 and 2023 for the construction of the planned new mini-mill;

Conservatively, no production from the new mini-mill in the forecast period;

No significant dividends, no share repurchases and no acquisitions.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Total debt/EBITDA sustained below 2.5x;

EBITDA margins sustained above 10%;

Visibility into substantial de-risking of the $3 billion new mini mill.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Total debt/EBITDA sustained above 3.5x;

EBITDA margins sustained below 8.5%;

A material weakening of domestic steel market conditions leading to materially weaker than expected EBITDA;

Prolonged negative FCF.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Solid Liquidity: As of June 30, 2021, U. S. Steel had $1.39 billion of cash and cash equivalents and $1.918 billion available under its $2.0 billion ABL credit facility due 2024 (not drawn). In addition, the company had $579 million available under its USSK credit facilities due 2023 and 2021 and $350 million under BRS' ABL due 2022. On July 23, 2021, U. S. Steel reduced the ABL to $1.75 billion from $2 billion.

Issuer Profile

U. S. Steel is an integrated steel producer of flat-rolled steel and tubular products with operations in North America and Europe. U. S. Steel is the second largest North American flat-rolled sheet producer, one of the largest producers of tubular goods in the U.S. and one of the largest integrated flat-rolled producers in Central Europe. In in addition to blast furnace production, U. S. Steel has some EAF production with its BRS and Fairfield Works facilities.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONSENTITY/DEBT	RATING	RECOVERY	PRIOR
United States Steel Corporation	LT IDR	BB- 	Upgrade		B

senior unsecured

LT	BB- 	Upgrade	RR4	B

senior secured

LT	BB+ 	Upgrade	RR1	BB

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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