UPDATE: S&P Cuts Cliffs Natural Resources (CLF) to Junk

Standard & Poor's Ratings Services said it lowered its corporate credit rating on Cliffs Natural Resources Inc. (NYSE: CLF) to 'BB-' from 'BBB-'. At the same time, we lowered our issue-level rating on the company's senior unsecured notes to 'BB-' from 'BBB-' and assigned a '4' recovery rating, indicating our expectation for average (30%-50%) recovery in the event of a payment default and the subordinate position of the unsecured bonds in the capital structure.

We also assigned our 'BB+' issue level rating, commensurate with a '1' recovery rating, to the company's senior unsecured revolving credit facility. The '1' recovery rating indicates our expectation for very high (90%-100%) recovery in the event of default because we expect the revolving credit facility will be secured by June 30, 2015.

The downgrade of Cliffs Natural Resources Inc. results from several adverse factors that caused us to revise our business risk assessment to "fair" and our financial risk assessment to "aggressive," from our previous assessments of "satisfactory" and "significant," respectively.

"The negative outlook reflects the possibility of a downgrade within the next 12 months if iron ore prices are sustained at about $85/ton or lower and credit measures continue to deteriorate," said Standard & Poor's credit analyst Amanda Buckland. "The negative outlook also reflects our forecast that Cliffs will need to seek covenant relief from bank lenders in the first half of 2015."

We could lower the corporate credit rating by one or more notches if iron ore prices are sustained around our base case price of $85/ton or lower and Cliffs is unable to either reduce its cost position or sell assets and use proceeds to reduce debt, because this would lead us to revise our financial risk assessment to "highly leveraged."

We could revise the outlook to stable if Cliffs can sustain debt leverage below 5x. This could occur if iron ore prices stabilize above $95/ton or if Cliffs reduces its costs or debt through debt repayment from assets sales or other actions to raise capital. Under a scenario with seaborne iron ore prices averaging $85/ton, Cliffs would need to decrease average iron ore cash production costs to about $58/ton, from our expectation that average cash costs of production will be about $68/ton for full year 2014.

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