United States Steel (X): Upgrading to Overweight as New IG-Rated Guaranteed Bonds Look Attractive

We are upgrading our issuer rating on U.S. Steel (X) to Overweight from Neutral as the structure is primarily composed of recently issued IG-rated bonds guaranteed by Nippon Steel. We are Overweight the IG-rated X '31s and X '36s (changing the primary instrument to the X '36s) and remain Neutral on the X 5y CDS and HY-rated X '37 bonds. We believe that continued momentum in domestic steel prices (US Hot-Rolled Coil prices indicated above $1,250/t, over ~35% higher YTD) and continued support from Nippon should drive compression in the X structure. Looking at IG comps, we like the X '36s trading 40bp wide to STLD and ~20bp wide to MTNA, and believe both relationships should be cut in half at the very least. X is mid-2x levered on a net basis and has significant support from Nippon Steel in building out its asset portfolio, increasing steelmaking capacity and maintaining/growing its competitiveness domestically. Versus HY rising star comps such as CMC and CRS, X 10y bonds only trade 15-25