���������ֳ�

���������ֳ� - New York - 01 Feb 2021: ���������ֳ� has upgraded Cleveland-Cliffs, Inc.'s (CLF) guaranteed unsecured notes to 'B'/'RR4' from 'B-'/'RR5'. The notes were removed from Rating Watch Positive. The upgrade of CLF's guaranteed senior unsecured notes is due to updated recovery assumptions following the acquisition of ArcelorMittal USA (AM USA), including a higher going concern (GC) EBITDA driven by CLF's addition of approximately 17 million tons of steelmaking capacity and limited new secured debt.

In addition, ���������ֳ� has affirmed CLF's Long-Term Issuer Default Rating (IDR) at 'B'. ���������ֳ� has also affirmed AK Steel Corporation's (CLF's subsidiary) Long-Term IDR at 'B'. Additionally, ���������ֳ� has affirmed CLF's asset-based loan (ABL) credit facility, CLF's first lien secured notes and AK Steel's first lien secured notes at 'BB'/'RR1', and affirmed CLF's unsecured convertible notes, the CLF unsecured notes not benefiting from guarantees and AK Steel's unsecured guaranteed notes at 'CCC+'/'RR6'. The Rating Outlook is Positive.

The Positive Rating Outlook reflects the closing of the acquisition of substantially all operations of AM USA for approximately $1.4 billion. ���������ֳ� views the acquisition as deleveraging while resulting in increased size, scale and end-market diversification. ���������ֳ� could resolve the Positive Rating Outlook if total debt to EBITDA is expected to trend below 4.0x or below while FCF is expected to be positive and is allocated toward gross debt repayment.

CLF's ratings reflect its vertical integrated operating profile, its self-sufficiency in iron ore, its focus on higher value-added steel production and its electric arc furnace (EAF)-focused, Toledo, OH-based hot briquetted iron (HBI) facility. ���������ֳ� believes Cliffs' internal requirements provide a stable source of iron ore demand. Cliffs' ratings also reflect subsidiary AK Steel Corporation's focus on higher value-added steels, which have higher barriers to entry, fixed-price contracts and premium pricing and are less susceptible to imports.

Rating concerns include Cliffs' high exposure to the automotive market, which ���������ֳ� expects to continue to be negatively affected by the coronavirus pandemic in 2021, resulting in lower shipments compared with 2019, however ���������ֳ� expects significantly higher EBITDA and significantly lower leverage in 2021 compared with 2020. ���������ֳ� expects the acquisition to increase end-market diversification and lower Cliffs' concentration in the auto market, which ���������ֳ� views as a credit positive. However, auto market exposure will remain relatively high.

���������ֳ� also expects total debt to EBITDA to be significantly lower in 2021 compared with 2020 and to trend lower over the rating horizon as the economy and steel fundamentals recover, combined with the addition of AM USA operations. ���������ֳ� forecasts Cliffs to have adequate liquidity and the company has no material maturities until 2024. However, ���������ֳ� views this as partially offset by expectations for slightly elevated total debt to EBITDA in 2021 and high interest and pension expenses, including the assumption of $1.47 billion in pension/other post-employment benefit (OPEB) obligations from AM USA.

Key Rating Drivers

AM USA Acquisition: Cliffs closed the acquisition of ArcelorMittal USA's operations for approximately $1.4 billion with a combination of $500 million of Cliffs' common stock, $373 million of nonvoting preferred stock and $505 million in cash. ���������ֳ� views the acquisition as a credit positive, as it is deleveraging, creates the opportunity for debt reduction and results in increased size, scale and end-market diversification. CLF is now the largest flat-rolled steel producer and largest iron ore pellet producer in North America.

The transaction is also expected to improve liquidity, as the ABL facility has been increased to $3.5 billion from $2.0 billion. ���������ֳ� believes total debt to operating EBITDA could trend to 3.5x or below by YE22 if Cliffs utilizes excess cash to reduce debt.

Lower Concentration in Auto: Approximately 66% of AK Steel's 2019 sales were to the automotive market, whereas roughly 27% of AM USA's 2019 sales were to the automotive market. ���������ֳ� views the increased end-market diversification and reduced concentration in the auto market positively. However, Cliffs will still have relatively high auto market exposure pro forma the acquisition and auto demand declined significantly in 2020, resulting in significantly lower EBITDA generation and elevated leverage.

AK Steel is one of a few North American steel producers capable of producing some of the most sophisticated grades of advanced high-strength steels and value-added stainless steel products, and the only producer of non-oriented electrical steel, a critical component of hybrid/electric vehicles' motors. AK Steel also produces steel grades critical to automotive light-weighting steel trends, and it is well positioned longer term to benefit from an auto recovery and the transition to electric cars.

AK Steel Merger: Cliffs consummated a merger with AK Steel, its second-largest iron ore pellet customer, on March 13, 2020, at which point AK Steel became Cliffs' wholly owned subsidiary. Cliffs' debt outstanding increased by approximately $2.24 billion in 1Q20, and Cliffs assumed significant pension obligations of AK Steel as part of the merger. However, ���������ֳ� views the transaction as relatively leverage-neutral on a normalized basis, with additional earnings offsetting the increase in debt.

The transaction created an integrated steel producer that is more than 100% self-sufficient in iron ore, resulting in the ability to continue to make third-party iron ore pellet shipments. ���������ֳ� views the transaction positively, as it expands Cliffs' customer base, provides a captive source of demand for a portion of its iron ore and creates the opportunity for synergies.

Liquidity/Debt Maturity Profile: Cliffs had cash and cash equivalents of $56 million and $1.123 billion available under its $2 billion ABL credit facility due 2025 as of Sept. 30, 2020. Cliffs issued $1.075 billion in secured notes in 2Q20, of which $736 million was used to reduce previously outstanding debt, while $120 million was intended to be used to finance the construction of its HBI production plant, resulting in $219 million of additional liquidity. Cliffs has amended its ABL credit facility to increase the facility to $3.5 billion from $2.0 billion following its acquisition of AM USA assets.

Cliffs also announced plans to suspend future dividends due to the pandemic's impact on operations, and it has the ability to defer capex by approximately $200 million. ���������ֳ� views the marginal increase in debt as offset by improved liquidity to weather a period of weak demand. ���������ֳ� believes Cliffs will use excess cash to reduce borrowings under its ABL credit facility as market conditions improve, as evidenced by its $250 million reduction in 2Q20.

Vertically Integrated Business Model: Cliffs' merger with AK Steel created a vertically integrated steel producer that is self-sufficient in iron ore, which ���������ֳ� expects to improve steel margins and provide the opportunity for synergies. Following its AM USA acquisition, Cliffs has roughly 17 million tons of additional steel capacity. The transaction creates the opportunity for further synergies and additional operational flexibility.

HBI Strategy: EAF steel producers have been taking market share from blast furnace producers in the U.S. As EAF steel producers expand into higher value-added steel products, they will require a higher quality, iron ore-based metallic, such as HBI, to produce higher quality steel. Cliffs' strategy is to become a critical supplier of HBI to EAFs, and it began construction on its Toledo HBI plant as part of that strategy.

Cliffs spent approximately $1 billion to construct the HBI plant and production of HBI began in December 2020. Cliffs expects annual capacity to be approximately 1.9 million tonnes once the plant is fully operational and to begin third-party shipments in 1Q21. HBI can also be used internally by AK Steel's and ArcelorMittal USA's blast furnaces to improve productivity.

Strong Operational Ties: ���������ֳ� has equalized the IDRs of Cliffs and AK Steel given the vertical integration between the entities, which results in strong operational and strategic ties. ���������ֳ� believes AK Steel will continue to account for a meaningful portion of Cliffs' iron ore production. ���������ֳ� views Cliffs' financial performance as linked to AK Steel's, as the steel and manufacturing segment will account for the majority of the combined company's sales. Additionally, certain Cliffs notes benefit from guarantees from AK Steel and some subsidiaries, providing legal ties between the entities. ���������ֳ� believes additional borrowing will be at the Cliffs level and expects the remaining AK Steel debt to be redeemed.

Derivation Summary

Cliffs is comparable in size but less diversified compared with integrated steel producer United States Steel Corporation (B-/Negative) and smaller than globally diversified steel producer ArcelorMittal S.A. (BB+/Negative). Cliffs is larger compared with EAF long steel producer Commercial Metals Company (BB+/Stable) in terms of steel capacity, although Cliffs has less favorable credit metrics. Cliffs is also larger in terms of annual capacity, although has less favorable credit metrics compared with EAF producer Steel Dynamics, Inc. (BBB/Stable).

Key Assumptions

���������ֳ�'s Key Assumptions Within Our Rating Case for the Issuer Include:

--Steel shipments decline significantly in 2020, recover in 2021 and approach approximately 16.5 million tons in 2023.

-- Capex of approximately $400 million in 2020, then roughly $500 million per year thereafter.

--No dividends in 2020 after 1Q20, dividend reinstated in 2021.

--No additional acquisitions or share repurchases through the rating horizon.

Key Recovery Rating Assumptions

The recovery analysis assumes CLF would be reorganized as a going concern (GC) in bankruptcy rather than liquidated. ���������ֳ� assumed a 10% administrative claim and assumed the ABL credit facility is 75% drawn in the recovery analysis.

GC Approach

A hypothetical default scenario could be caused by a prolonged recession or a period of prolonged low steel prices potentially caused by a combination of weak demand and elevated imports. ���������ֳ� assumed a bankruptcy scenario exit GC EBITDA of $1.25 billion. The GC EBITDA estimate is reflective of a midcycle sustainable EBITDA level upon which ���������ֳ� bases the enterprise valuation. The higher GC EBITDA reflects CLF's acquisition of approximately 17 million tons of steelmaking capacity. The $350 million of additional EBITDA does not reflect $150 million of anticipated synergies.

���������ֳ� generally applies EBITDA multiples that range from 4.0x to 6.0x for metals and mining issuers given the cyclical nature of commodity prices. ���������ֳ� applied a 5.0x multiple to the GC EBITDA estimate to calculate a post-reorganization enterprise value of $4.05 billion after an assumed 10% administrative claim. The 5.0x multiple compares with CLF's 5.6x acquisition multiple based off of AK Steel's LTM-adjusted EBITDA as of Sept. 30, 2019.

The allocation of value in the liability waterfall results in a Recovery Rating (RR) of 'RR1' for the first lien secured ABL credit facility and the first lien secured notes, which results in a 'BB' rating; an 'RR4' for the CLF senior unsecured guaranteed notes, which results in a 'B' rating; and an 'RR6' for the CLF unsecured notes not benefiting from guarantees; the AK Steel guaranteed unsecured notes and the CLF convertible notes result in a 'CCC+' rating. The unsecured convertible notes and unsecured 2040 notes do not benefit from guarantees and are therefore subordinated in the recovery waterfall.

RATING SENSITIVITIES

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

-- Total debt to EBITDA sustained below 4.0x.

--The expectation of sustained positive FCF.

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

--Total debt to EBITDA sustained above 5.0x.

--Weaker than expected auto demand and/or a slower than anticipated economic recovery

resulting in sustained negative FCF.

--Deteriorating liquidity position.

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 /site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: As of Sept. 30, 2020, CLF had $56 million in cash and cash equivalents, and $1.715 billion available under its $2 billion ABL credit facility due 2025. In 4Q20, CLF amended its ABL which resulted in an increase in size to $3.5 billion from $2.0 billion. The ABL credit facility matures in 2025, or 91 days prior to the stated maturity date of any portion of existing debt if the aggregate amount of existing debt that matures on the 91st day is greater than $100 million. The ABL credit facility is subject to a springing 1.0x minimum fixed-charge coverage covenant when availability is less than the greater of (i) 10% of the lesser of (a) the maximum ABL amount (currently $2 billion) and (b) the borrowing base; and (ii) $100 million. CLF suspended its dividend and has no material maturities until 2024, but it has pension expense obligations.

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 ���������ֳ�'s ESG Relevance Scores, visit .

Additional information is available on

Additional Disclosures

• Dodd-Frank Rating Information Disclosure Form
• Solicitation Status
• Endorsement Policy

Endorsement Status