EFTA01385453.pdf

3 January 2018 HY Corporate Credit HY Multi Sector.Media. Cable & Satellite AK Steel Holding Corporation (AKS): Gloomy Anticipated 40 Results Likely the Bottom; Entire Structure up to BUY Investment Thesis Despite what we would characterize as a rather less-encouraging quarter from the integrated steelmaker in 3017, we still see value in AKS' outstanding notes and expect them to appreciate from today's levels once we get past what will likely be a dismal Q4-2017. AKS guided to lackluster results in 4Q due to input cost inflation amid stable steel prices that are likely to achieve higher levels and cover the cost inflation in 01.2018. After a strong beginning to 2017, AKS' 2H-2017 results have underperformed expectations on account of higher-than- anticipated planned maintenance expense (which should be viewed as a positive in that AKS actually regularly services its various facilities, unlike some other steel peers) coupled with inflationary input costs. We are reinforcing our positive view of the steelmaker considering 1) the market is aware that 4017 is likely to be a bad quarter, 2) domestic steel pricing and capacity utilization is on the rise, and 3) we expect price hikes to offset increased input cost expense in 1018. More, the highest proportion of AKS' contracted prices renew around yearend; given higher spot steel prices, we would expect AKS' contracted-part of its pricing matrix to be higher YoY, particularly with automakers, which should help mitigate any potential volume weakness on the automotive front. Lastly, AKS' Precision Partners acquisition in July 2017 has yet to anniversary a full year of earnings and we expect 1H-2018 to benefit from the acquisition. Hecornmendat ion Hence given our belief that most of this weakness is already baked-in to price levels, we are moving the entire capital structure to a Buy rating. We initiate on the 6.375% senior notes due 2025 (98.75 price, 6.6% YTW, 405 OAS) with a Risks Buy rating. We are also increasing our rating on AKS' 7.625% senior notes due Downside risks to our Buy 2021 (103.75 price, 5.0% YTW. 333 OAS) to a Buy rating due to our ratings include increased expectation that AKS will come to market and refinance the earliest maturing imports of foreign steel, note in 2018 now that the bonds have become callable at 103.813%. We lower automotive production, reiterate our Buy rating on AKS' 7.5% senior secured notes due 2023 (108.25 share losses to aluminum, price, 4.3% YTW, 233 OAS). While the 7.5% secured notes are rated B1/BB-, unplanned outages, an we see them as an upgrade candidate to Ba3 by Moody's and believe they inability to offset inflationary should trade more in line with 88 credits, especially considering a strong input costs in 2018 with collateral package, inability to layer and solid 1.7x net leverage ratio. Similarly, higher selling prices, union we reiterate our Buy rating on AKS' 7.0% senior notes due 2027 (101.750 price, disputes, interest rate hikes. 6.7% YTW, 412 OAS) for the reasons listed above. Figure 4 - AK Steel Holding Corporation (ARS) 3017 Capitalization cualtignillan gang Bid / NL Mkt Value YTW / NL Cash & Equivalents $64 $64 $1.35bn L+200 ABL Revolver 9/13/22 415 415 $380mn 7.50%Sr Sec'd Nts 7/15/23 380 108250 380 31:. Capital lease 25 25 Secured Debt fi20 17x MI20 1.7x $150mn 5.00% Sr Converts 11/15/19 150 131 875 150 -10 OYi $430mn 7.625% Sr Nts 10/121 406 103.750 406 $280mn 6.375% Sr Ms 10/15/25 280 98.750 277 6.6''.. $400mn 7.000% Sr Nts 3/15/27 400 101.750 400 s 7', Industrial Rev Bonds due 2020-2028 99 99 Other (E) (§Z) Teti Debt Wee 4.5x 42,094 4Ax Market Capitalization as of 12/22/17 $1,781 3.9x $1,781 3.9x Net Entombs Value sum tAx 0,511 0,4x San. Ovutsch• So. Carps,. &worn Deutsche Bank Securities Inc. Page 179 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0086738 CONFIDENTIAL SDNY_GM_00232922 EFTA01385453