This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.
U.S. Steel (X) is having another tough day in the market Tuesday, as a metals and oil price rally proved short-lived and incapable of quelling investor fears over the company's heavy debt burden.
The Pittsburgh steelmaker was down 4% in afternoon trading, as peers AK Steel (AKS) and TimkenSteel (TMS) were doing comparatively better, despite all three being members of Real Money's distressed watch list. (Timken was trading up 2%, while AK Steel was down roughly 1%.)
U.S. Steel has been particularly plagued because shareholders (and lenders) are growing concerned about a narrowing debt runway that the manufacturer will have before needing to start turning a profit; otherwise, it may become overwhelmed by its more than $3 billion in debt obligations.
The closest debt maturity approaching is $450 million of high-yield bonds, rated B2 and B by Moody's and S&P, or five notches below investment grade. The tranche pays more than 6% annual interest and traded at roughly $0.70 on the dollar in secondary trading Tuesday. That portion is followed by a $500 million slice of high-yield debt maturing in 2018, paying out 7% interest.
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Such high-yield bonds can often be an onerous financing source when corporations see earnings recede under deteriorating market conditions, such as a collapse in metal prices that's hammered the steel industry over the past year, compounded by the disappearance of metal orders from many once-reliable reliable oil-and-gas customers.
And the weight of more than $3 billion in total debt is forcing U.S. Steel to shell out more than $50 million per quarter, despite failing to generate net income since a mere $102 million in 2014. (The company posted a loss of $1.5 billion in 2015.)
"We're still in great cash position, paying off $300 million worth of debt, and we still got $2.4 billion worth of liquidity," CFO David Burritt said on the company's January earnings call. "So we feel extraordinarily comfortable where we are today. But living in this paranoid world of steel, we certainly have to adapt what's ever there. We're not going to tell you what the next steps are, but you can understand that we're on it and we got it."
For more on Real Money's 20 distressed companies to watch: