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According to Reuters, ratings agency Standard & Poor’s (S&P) has cut AK Steel Holding Corporation’s (AKS - Analyst Report) rating to “B+” from “BB-“. The rating downgrade was driven by the company’s weak performance and also the difficult conditions in the industry. The rating outlook was kept as stable by the agency.

The company has been struggling due to weakness in construction and housing sectors. It posted a loss of 11 cents in its most recent quarter, down from a profit of 8 cents in the year ago period. AK Steel’s shipments declined almost 7% year over year and dragged revenues down by 4.6%.

Things went from bad to worse for AK Steel after it provided a downcast outlook for the second quarter. Although the company projects a marginal jump in shipments and expects to post a profit, it would still lag behind last year’s profit of 32 cents by a wide margin.

AK Steel pointed that uncertain economic conditions and deteriorating spot market prices are the prime factors affecting its performance. In addition, it faces greater challenges from increasing imports in the domestic markets, along with industry oversupply due to ramp up of operations by its peers.

S&P also reiterated the above mentioned concerns in its rating action. In addition, the agency believes that AK Steel’s high fixed costs along with weakening spot prices are areas of concern. Also, sluggish growth in construction and housing sectors might further pressurize earnings. Although AK Steel has recently made acquisitions with an eye on controlling costs, they might not be enough to solve its problems regarding raw material requirements in the near future.

However, the agency recognizes the company’s strong liquidity position and impressive standing in various steel products. AK Steel's liquidity position is strong enough for it to meet its debt obligations and it also does not have any significant debt maturities to meet for the next eight years.

S&P might raise AK Steel’s ratings if it can improve its operational strengths and is aided by better pricing and faster growth of the U.S. economy. However, if the industry moves in the opposite direction, and AK Steel’s earnings before interest, taxes, depreciation and amortization (EBITDA) remain below $300 million, debt to EBITDA hovers above 6 times, and total liquidity drops below $300 million, S&P might downgrade ratings further.

We currently have a long-term Underperform recommendation on AK Steel. The company, which competes with Nucor Corporation (NUE - Analyst Report), U.S. Steel Corp. (X - Analyst Report) and Steel Dynamics Inc. (STLD - Snapshot Report), holds a short-term Zacks #5 Rank (Strong Sell).
 

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