Fitch Rates Gerdau's Proposed Sr. Unsecured Notes 'BBB-'

2009-11-10 17:32:06 -

Fitch Ratings has assigned a 'BBB-' rating to Gerdau S.A.'s (Gerdau) proposed notes due in 2019 to be issued by its wholly owned subsidiary Gerdau Holdings Inc. These notes will be unconditionally and irrevocably guaranteed by Gerdau S.A., Gerdau Acominas S.A., Gerdau Acos Longos S.A., Gerdau Acos Especiais S.A., and Gerdau Comercial de Acos S.A.
Proceeds of this issuance will

be used to refinance debt.

Strong Business Position and Resilient Credit Quality.

The 'BBB-' rating of the proposed notes reflects Gerdau's sound credit profile during the trough of the industrial cycle, and is supported by its solid balance sheet. The company's investment grade ratings are also supported by its low cost and dynamic operating structure, which has allowed it to adjust quickly to the market downturn. Gerdau's flexible operating structure and strong business position, as one of the largest steel producers in the Americas, will allow it to benefit quickly from a rebound in steel demand.

Strong Liquidity Position.

Gerdau had BRL5.4 billion (USD3.1 billion) of cash and marketable securities as of Sept. 30, 2009. During 2010 and 2011 the company faces debt amortizations of BRL2.1 billion (USD1.2 million) and BRL2.6 billion (USD1.5 billion), respectively. The company's U.S. subsidiary Ameristeel also has additional access to liquidity in the form of two committed and undrawn credit lines. These facilities are comprised of an asset-backed loan of BRL1.6 billion (USD950 million) at Ameristeel's GNA Partners subsidiary level, of which 57% is backed by collateral, and a BRL195 million (USD100 million) revolving credit facility at Macsteel. The maturity dates for these credit lines are Oct. 28, 2010 and May 27, 2011, respectively.

Material Gross Debt Reduction.

Gerdau's net debt to latest 12 months (LTM) EBITDA ratio has increased to 2.7 times (x) in the third quarter of 2009 from 2.0x in the second quarter, almost a turn higher than 1.8x at year-end 2008. The increase in this ratio is a direct result of lower EBITDA generation in 2009.
Gerdau has taken steps that have reduced gross debt to BRL16.1 billion (USD9 billion) as of Sept. 30, 2009, from BRL23 billion (USD13 billion) at the end of 2008. These steps include the prepayment of a BRL800 million (USD405 million) note due in 2011. Fitch expects Gerdau's net leverage to return to below 2.0x by the end of 2010.

Sound Investment Plan.

Fitch views Gerdau's large share of investment in its domestic market favorably, due to an expected GDP growth of 4.8% during 2010 in Brazil.

Year-to-date capital expenditures total BRL1 billion (USD566 million).
Gerdau intends to invest BRL9.5 billion (USD5.4 billion) over the next five years, 80% of which will be invested in Brazil. BRL1.8 billion (USD1 billion) of this amount is to be used for Gerdau's first heavy plate rolling mill, which will have an annual output capacity of 1.0 million tons starting late 2012. In addition, Gerdau announced the restarting of operations at its Varzea do Lopes iron ore mine in Brazil, leading to annual production of 1.5 million metric tons, which will be combined with output from its Miguel Burnier iron ore production plant to reach a total annual production of 2.7 million tons of iron ore for internal consumption. Significant investments outside of Brazil include an expansion of the company's JV in India.

Positive Exposure to Domestic Market.

Gerdau's consolidated operating EBITDA in 2008 of BRL10 billion (USD5.6 billion) was mostly generated by the company's Brazilian operations (52%), followed by North America (25%), Specialty Steel including Europe (14%), and rest of Latin America (9%). The concentration of the company's cash flow in Brazil ensures it is well placed to benefit as demand in the country is stronger than in North America and Europe in the current economic climate. Historically, these operations have also had the highest profit margins. During 2008, the company's Brazilian EBITDA margin was 37%, while its margins in the other markets varied between 17% and 21%. Fitch expects a gradual increase in steel consumption in Brazil and throughout the region in the second half of 2009, with more significant growth in 2010. Some of the increase in demand will be driven by stimulus measures taken by the Brazilian government and other governments in the region.

Results Improving but Remain Weak.

Gerdau produced 4 million tons of steel during the third quarter of 2009, a 30% increase from the prior quarter. Year-over-year results remain weak, however, as the company produced 5.1 million tons of steel during the third quarter of 2008. Gerdau generated BRL4 billion (USD2.3 billion) of EBITDA during the LTM ended Sept. 30, 2009, a decline from BRL10 billion (USD5.7 billion) during 2008. Fitch expects Gerdau's crude steel output to reach approximately 13.5 million metric tons during 2009, a reduction from 19.6 million metric tons in 2008. This should lead to an EBITDA for 2009 of approximately BRL4.2 billion.

Potential Rating and Outlook Drivers.

Factors that could lead to consideration of a Negative Outlook or downgrade include a prolonged duration of depressed worldwide demand for steel products that would fundamentally change Gerdau's medium-term capital structure. Any additional material debt increases would pressure the ratings at their current level. In addition, a change in management strategy with regards to conservative capital expenditure during the crisis or debt-funded acquisitions could also negatively impact Gerdau's credit profile, as would a significant erosion of liquidity position.
Factors leading to a consideration of a Positive Outlook or upgrade include successfully maintaining a conservative capital structure throughout the downturn and improving on its pre-crisis 'normalized' credit profile, as well as emerging from the crisis with an optimized and improved competitive position globally.

A full credit analysis of Gerdau is available at ' www.fitchresearch.com : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww .. '.

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Fitch RatingsJay Djemal, +1-312-368-3134, ChicagoJoe
Bormann, CFA, +1-312-368-3349, ChicagoRicardo Carvalho,
+55-21-4503-2600, Rio de JaneiroMedia Relations:Brian
Bertsch, +1-212-908-0549, New York brian.bertsch@fitchratings.com : mailto:brian.bertsch@fitchratings.com