US Steel Bonds Rebound to Par on Auto Sales: Corporate Finance

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U.S. Steel Bonds Rebound to Par on Auto Sales

Emile Wamsteker/Bloomberg

A worker welds steel sheets in Lebanon, New Jersey, U.S.

A worker welds steel sheets in Lebanon, New Jersey, U.S. Photographer: Emile Wamsteker/Bloomberg

U.S. Steel Corp. (X), the nation’s
biggest producer of the metal by volume, is making a comeback in
debt markets as vehicle sales recover, fueling a surge in its
bond prices from a record low.

The Pittsburgh-based steelmaker’s benchmark debenture has
climbed above 100 cents on the dollar, or par, for the first
time since August after plunging to 87.75 cents on Oct. 5, the
lowest since the debt was sold in March 2010. Credit-default
swaps on the company are trading at an almost five-month low.

Auto production, which accounts for 24 percent of all steel
shipped in the U.S., is at the highest levels since 2008 as
carmakers respond to rising consumer confidence. At the same
time, steel prices are up 15 percent since November as growth in
the world’s biggest economy eases stress from Europe’s three-
year debt crisis. U.S. Steel, America’s first $1 billion company
after its creation at the turn of the 20th century by Andrew Carnegie and J.P. Morgan, made at least 21 percent of its
revenue the past three quarters from its European unit.

“Europe is not a nice place to be in the steel business
now, but it doesn’t seem to have really pushed its way into the
U.S.,” Monica Bonar, a New York-based analyst for Fitch
Ratings, said in a telephone interview. “Two bright spots are
energy and automotive, and people have upwardly revised where
they see the economy going.”

U.S. Steel’s $600 million of 7.375 percent bonds due April
2020 have climbed 12 cents on the dollar since Oct. 5 to 100.5
cents, trading above par for the first time since Aug. 3,
according to Trace, the bond price reporting system of the
Financial Industry Regulatory Authority. The yield on the debt
fell to 7.29 percent from as high as 9.5 percent.

Spreads Narrow

Relative yields on the steelmaker’s bonds average 558 basis
points, or 5.58 percentage points, down from 597 on Oct. 24,
when it was cut one level by Moody’s Investors Service to Ba3,
three levels below investment grade. As U.S. Steel’s spreads
narrowed, those for its speculative-grade peers expanded during
the same period to an average of 750 basis points from 736 basis
points, according to Bank of America Merrill Lynch index data.

The company had $3.9 billion of total debt outstanding as
of Sept. 30, according to a regulatory filing.

Erin DiPietro, a spokeswoman for U.S. Steel, didn’t
immediately comment.

U.S. Steel was formed by the merger of 10 companies that
combined furnaces, ore deposits and transportation units into
what was conceived as a trust, according to business historian
Hoover’s Inc. Carnegie, whose Carnegie Steel was the largest,
wanted to retire, and banker J.P. Morgan paid him almost $500
million in a bid to merge with his own Federal Steel.

Auto Sales Climb

The company produced 67 percent of the country’s steel in
its first year, and it prospered through the two World Wars. The
U.S. steel industry ran into trouble in the 1970s as materials
costs rose and international competition increased, according to
Hoover’s.

The steelmaker’s debt-market recovery this year follows the
best year for auto sales since 2008. U.S. auto sales increased
to 12.8 million last year, up from 13.2 million in 2008,
according to Autodata Corp.

The larger sales allowed General Motors Co. to reclaim the
top spot in world vehicle sales from Japan’s Toyota Motor Corp.
and begin 24-hour-a-day production at many plants for the first
time since the industry collapsed in 2009.

Auto production reached 8.9 million last month, 16 percent
higher than a year earlier and the most for a December since
2007, according to Federal Reserve data compiled by Bloomberg.

Largest Customers

Of the steel produced in the U.S. in 2010, 24 percent went
to customers in the automotive industry, according to data from
the American Iron and Steel Institute. GM, Chrysler Group LLC,
Ford Motor Co. and Toyota are four of U.S. Steel’s largest
customers by revenue, according to Bloomberg data.

The U.S. economy expanded in the final three months of 2011
at a 3 percent annual rate, the strongest since the second
quarter of 2010, according to the median forecast of economists
surveyed by Bloomberg. The unemployment rate fell to 8.5 percent
last month, the lowest since February 2009, as employers added
200,000 workers to payrolls, exceeding the 155,000 median
projection in a Bloomberg News survey.

“Back in the summer there was a lot of fear we were going
into a double-dip recession,” Timothy Hayes, an analyst at
Davenport Co. in Richmond, Virginia, said in a Jan. 11
interview. “Those fears have been put to rest.”

Hot-Rolled Coil

The average annual capacity utilization of U.S. steelmakers
climbed to 75 percent in 2011 from 51 percent in 2009, the year
steelmakers idled 30 percent of their capacity after the housing
crisis and global financial meltdown.

The price of hot-rolled steel coil, a benchmark product
used in autos and appliances, has jumped 15 percent since
November to $735 a short ton, according to data from Steel
Business Briefing.

Improving demand is “largely from the capital goods
industry, the automotive industry and the energy industry
recovering close to or sometimes a little better than where they
were prior to the crash,” Aldo Mazzaferro, a New York-based
analyst at Macquarie Capital USA Inc., said in a telephone
interview.

The growth has raised a measure of the credit rating that
is implied in the credit-default swaps market, where traders
effectively downgraded them into deeper junk levels in October,
data from Moody’s Corp.’s capital markets group shows.

Implied Ratings

Credit swaps tied to the company, which typically rise as
investor confidence deteriorates and fall as it improves, fell
to 690 basis points today, the lowest since Sept. 1, from 966
basis points on Oct. 4, according to data provider CMA. A basis
point equals $1,000 annually on a contract protecting $10
million of debt.

The swaps are trading at levels that imply a B2 rating by
Moody’s Investors Service, higher than the B3 rating the market
was implying in October and two steps lower than its actual
Moody’s grade of Ba3.

U.S. Steel shares have fallen 46 percent in the 12 months
ending yesterday to $28.28, while a Standard Poor’s index of
materials producers fell 2.2 percent during the same period. The
stock is up 26 percent since Oct. 25, the day after Moody’s cut
the company’s rating, citing a high debt to Ebitda, or leverage,
ratio of 6.4 times as of June 30.

“We expect disappointing guidance” for the first quarter,
Sal Tharani, an analyst at Goldman Sachs Group Inc. in New York,
wrote in a Jan. 11 research note. If steel prices start to slip,
he wrote, the company “would underperform the most due to its
high leverage to steel prices.”

Third-Quarter Earnings

U.S. Steel generated $340 million of earnings before
interest, taxes, depreciation and amortization in the third
quarter, up from $30 million in the year-over-year period,
according to data compiled by Bloomberg. That is lower than the
$354 million estimated by KDP Investment Advisors, a high-yield
debt research firm, according to an Oct. 27 report.

The company posted an operating loss of $50 million in
Europe for the third quarter, double its deficit from a year
earlier, Bloomberg data show. Revenue from U.S. Steel Europe
made up 21.1 percent of its total in that quarter.

“The fourth quarter turned out to be a little bit better
than everyone had anticipated but you still need a broader-based
U.S. economic recovery, not to mention a global recovery, to
really see the sustainability of that,” Carol Cowan, a Moody’s
analyst, said in a telephone interview. “It’s a slow recovery
for the industry and U.S. Steel is no different in that
respect.”

To contact the reporter on this story:
Richard Bravo in New York at
rbravo5@bloomberg.net;
Sonja Elmquist in New York at
selmquist1@bloomberg.net

To contact the editor responsible for this story:
Faris Khan at
fkhan33@bloomberg.net;
Simon Casey at
scasey4@bloomberg.net

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