CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the long-term foreign and local currency Issuer Default Ratings (IDRs) of Usinas Sideruurgicas de Minas Gerais S.A. (Usiminas) to 'BB+' from 'BBB-' and national scale rating to 'AA(bra)' from 'AA+(bra)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
Fundamentals & Metrics no Longer Commensurate with Investment Grade:
Usiminas' credit fundamentals began to weaken in 2008 as a result of increasing input costs, pricing pressure and a heavy investment cycle. These factors have resulted in a structural shift in the company's credit profile away from strong historical levels. While the company has embarked on cost efficiency measures and structural reorganization, Fitch does not envisage a return to the company's historical credit profile in the near to medium term.
The financial impact has led to a sustained deterioration in Usiminas' five-year rolling average credit ratios. The company's five-year rolling average total adjusted debt to EBITDA and net adjusted debt to EBITDA ratios increased to 3.3x and 1.4x in 2011 from 1.9x and 0.7 in 2010, respectively. Coverage ratios have also weakened, as demonstrated by the company's five-year rolling average FFO Fixed Charge Coverage ratio decreasing to 6.9x in 2011 from 9.5x in 2010.
Rating Stability Dependent on Success of Cost Efficiency Measures:
The Stable Outlook reflects an expected turnaround in the company's profitability and credit metrics in the next 12 to 18 months. Usiminas' cost structure has deteriorated considerably due to the price increase limits imposed by a very competitive flat steel market in Brazil and even more competitive export market, while faced with high energy, raw material and labor costs. This situation has proven to be prolonged and entrenched.
The company has embarked on a cost reduction program and organizational restructuring. These measures are in addition to the improved profitability expected at the consolidated level from the increase in iron ore production at Mineracao Usiminas, the mining subsidiary. The Ternium Group, the second largest shareholder after Nippon Group (29.45%) acquired 27.66% of the company's voting capital in January 2012, and shortly after a new CEO was appointed tasked with improving profitability and concentrating on customer relationships.
Profitability is expected to recover through a mix of higher prices, better product mix with the completion of the new hot-dip galvanized steel line at Unigal, lower raw material costs, increased steel and iron ore volumes and a more favorable exchange rate.
Usiminas' consolidated profitability should also benefit from its increasing iron ore output from mining subsidiary, Mineracao Usiminas. The company originally planned to reach an installed annual production capacity of 8 mtpy by end of 2011, but actual sales volumes fell short of expectations and reached just over 5.5 mtpy.
Usiminas is now targeting an installed production capacity of 12 mtpy by year-end 2012. In 2011, mining represented just 8% of consolidated revenues but 48% of consolidated EBITDA. This is because the company enjoyed iron ore EBITDA margins of 62% in 2011 with iron ore prices around USD170-USD185 per metric ton.
In 1Q'12, the mining division's EBITDA margin decreased to 46.3% as iron ore prices abated to around USD145 per metric ton. Usiminas is currently 50% self-sufficient in iron ore, with plans to become 100% self-sufficient by 2015. In addition, the company is currently 20% self-sufficient in energy and is targeting 100% energy self-sufficiency, also by 2015.
Slow Climb Back to Historical Long-Term Credit Profile:
Usiminas reported poor financial results for 2011. Credit metrics are not expected to recover significantly during 1H'12, as the effect of recent cost efficiencies, a depreciating currency, and better product mix will take time to filter through. The company ended 2011 with total adjusted debt to EBITDA and net adjusted debt to EBITDA ratios of 7.5x and 3.4x, respectively. These ratios slightly abated in 1Q'12 on a LTM basis to 7.0x and 3.3x, respectively.
The combination of higher operating costs, flat volumes, and weak prices resulted in a negative impact on Usiminas' profitability. Year-end 2011 revenues were BRL11.9 billion compared to 2010 revenues of BRL12.9 billion. While revenues were BRL1 billion lower in 2011, EBITDA margins decreased by almost half to 11% in 2011 from 20% in 2010.
Usiminas has had a challenging start to 2012. On a quarter by quarter comparison basis, 1Q'12 revenues of BRL2.9 billion were 6% lower than 1Q'11 revenues of BRL3.1 billion, while 1Q'12 EBITDA of BRL190 million was 44% lower that 1Q'11 EBITDA of BRL337 million. Revenues for the LTM to March 31, 2012 were BRL11.7 billion and EBITDA was BRL1.3 billion.
Negative Cash Flows Resulting from Low Profitability & High Capex:
The ratings downgrade also follows a marked deterioration in the company's cash flow generation. Usiminas exhibited negative FFO of BRL1.1 billion in 2011 mainly as a result of a reduced net income of BRL404 million compared to BRL1.6 billion in 2010. CFFO in 2011 benefited from a working capital inflow of BRL604 million but remained negative at BRL471 million.
As a result, Usiminas' FCF was negative BRL3.5 billion for the year, significantly below Fitch's Downside Case expectations in 2011 for FCF of negative BRL2.8 billion that already envisaged a low net income and significant capex. Additionally, FCF was impacted by capital expenditures of BRL2.7 billion and dividends of BRL372 million in 2011. The company also exhibited negative FCF of BRL2.5 billion in 2010 as a result of the ongoing investment period.
Fitch expects to see improvement in Usiminas' FFO from negative 2011 levels to around BRL1.2 billion in 2012 and around BRL1.6 billion by 2013 as investments begin to contribute to financial performance. CFFO is also expected to recover to levels around BRL1.3 billion in 2012 and BRL1 billion in 2013.
Higher Levels of Steel Imports into Brazil:
Steel import volumes in Brazil were more 'normalized' during 2011 at 2.8 million metric tons per year (mtpy) according to ISSB but still higher than historical levels. This was mainly as a result of the Real's depreciation against the USD, cost reductions imposed by domestic steel companies, and anti-dumping measures taken by the Brazilian government. Prior to 2010, Brazil steel import volumes were historically below 2.5 mtpy. In 2010, steel import volumes increased to 5.6 mtpy, a 158% increase on 2009 volumes of 2.2 mtpy due to the strong Brazilian Real and robust domestic demand.
While Usiminas decreased prices for its steel to be more competitive with the cheaper steel imports, its cost structure increased significantly, squeezing profitability to its lowest ever levels. Usiminas has faced greater difficulties than competitors to adjust its cost structure accordingly, mainly as a result of its size and lower degree of integration in raw materials, namely iron ore. Strategic decisions are expected to be more forthcoming since entry of the new shareholder, Ternium Group in early 2012.
Liquidity is Comfortable for the Rating Category:
Usiminas has no liquidity issues and benefits from a comfortable debt amortization profile as of March 31, 2012. Usiminas had a cash to short term debt ratio of 2.4x with cash and marketable securities of BRL4.8 billion and short-term debt of almost BRL2 billion. Debt repayments due during the remainder of 2012 are BRL676 million. Cash on balance sheet is enough to cover debt repayments due until 2014.
The company also has access to two RCFs, one for USD750 million with five different banks available for up to five years, and another for BRL2 billion with BNDES available for use in capex projects. Usiminas also has a USD120 million credit facility available with JBIC.
The most restrictive covenant for Usiminas is its total debt-to-EBITDA ratio of 3.5x. Usiminas received a waiver for the expected breach of this covenant in December 2011. Fitch's 2012 Base Case scenario indicates the company's net-debt to EBITDA ratio will not fall below 3.5x until 2014. Based on these conservative projections, the company is expected to continue requesting covenant waivers as needed through the intensive investment cycle for iron ore.
Recovery in Capacity Utilization Level:
Usiminas has an annual crude steel production capacity of approximately 9.5 million metric tons and its capacity utilization levels fell from close to 90% in 3Q'08 to the low of around 40% during 2Q'09. Crude steel capacity utilization for Usiminas recovered to around 75% for 2011.
The increase in capacity utilization was due to robust domestic demand for steel, while prices remained constrained due to import pressures. Usiminas sold 1.7 million metric tons of steel during the first quarter of 2012. This compares to sales volumes achieved in the first quarter of 2011 of 1.2 million metric tons, indicating a recovery in Usiminas' market share following the implementation of significantly lower price premiums for its products to compete with the cheaper steel imports.
Factors leading to consideration of a Positive Outlook or a ratings upgrade include significant improvement in profitability and return of credit metrics to historical levels on a sustained basis. This can be achieved by the continued integration of the mining, energy and logistics businesses into Usiminas providing better levels of self-sufficiency and higher profit margin generation.
A Negative Outlook or downgrade could occur if the company's credit metrics and cash flow generation remain stagnant at current levels alongside an erosion of liquidity. The ratings could also be downgraded if the expected improvements from cost efficiency measures and recent projects fail to materialize as planned. A downgrade could also follow further credit profile deterioration in the medium term as a result of market conditions and a weakening of the company's capital structure.
Fitch has downgraded the credit ratings of Usiminas as follows:
--Foreign currency IDR to 'BB+' from 'BBB-';
--Local currency IDR to 'BB+' from 'BBB-';
--National scale rating to 'AA(bra)' from 'AA+(bra)';
--US$500 million Global Medium-Term Note Program to 'BB+' from 'BBB-';
--US$400 million notes due 2018 to 'BB+' from 'BBB-';
--BRL500 million 4th debenture issuance due 2013 to 'AA-(bra)' from 'AA(bra)'.
The Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 12, 2011;
--'National Ratings Criteria', Jan. 19, 2011;
--'Evaluating Corporate Governance', Dec. 13, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143
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