CHICAGO & RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has assigned ratings of 'BBB-(EXP)' to Gerdau S.A.'s (Gerdau) senior unsecured notes of up to USD1.25 billion due 2024. The notes will be jointly issued by the company's wholly-owned subsidiaries GTL Trade Finance Inc. and Gerdau Holdings Inc. They will be guaranteed by Gerdau S.A., Gerdau Acominas S.A., Gerdau Acos Longos S.A., and Gerdau Acos Especiais S.A.
Proceeds from the notes will be used to partially refinance the outstanding GTL Trade Finance Inc. notes due 2017 and Gerdau Holdings Inc. notes due 2020 and for general corporate purposes. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
Stable Capital Structure:
Gerdau's investment grade ratings are
supported by its historical and projected through-the-cycle credit
profile, robust liquidity, dynamic production structure and vertical
integration to varying degrees in scrap, iron ore and coal. The company
also maintains a commitment to a conservative capital structure, as
demonstrated by its public stock offering in April 2011. The stability
in Gerdau's credit metrics can be seen in the company's five-year
rolling average funds from operations (FFO) adjusted leverage ratio of
3.6x, which compares well to its regional peers, and its five-year
rolling average net debt to EBITDA ratio of 2.6x as of 2013. The ratings
are also supported by the company's position as the leading
geographically diversified long steel producer in the Americas, which
cushions revenues from volatility associated with exposure to any one
single country.
Resilient Cash Flows:
Gerdau's ability to generate positive free
cash flow (FCF) during periods of significant investments or difficult
trading conditions also supports the company's investment grade ratings.
This was seen during 2013 and from 2011-2009 when the company's FCF was
BRL1 billion, BRL927 million, BRL120 million, and BRL4.6 billion,
respectively. Domestic competitors mostly reported negative FCF over the
same period. In 2012, the company's FCF was negative BRL1.7 billion
(after capital expenditures of BRL3.1 billion and dividends of BRL523
million) but returned to a strong positive position in 2013. Gerdau's
diversified operations and mini-mill structure have enabled it to react
dynamically to changes in the global and domestic operating landscapes
over the last five years. The company generated FFO of BRL3.2 billion
and CFFO of BRL4.1 billion during 2013. Fitch's base case indicates an
increase in FFO to BRL3.5 billion driven by continued strong cash flow
generation during 2014. This level of cash flow generation is expected
to decrease Gerdau's FFO adjusted debt ratio to around 3.2x in 2014.
FX Volatility Effects:
During 2013, the company successfully
implemented steel price increases. The ability to increase prices is due
to the BRL weakening against the USD, lowering import levels of long
steel into Brazil. Partially offsetting this price gain is the fact that
80% of the company's debt is denominated in USD as of Dec. 31, 2013,
with the BRL devaluation impacting the company's leverage ratios. Gerdau
does have a substantial natural hedge against FX volatility because 50%
of its revenues are generated in USD, and this mitigates the impact to
some extent. Fitch expects the company to generate EBITDA of around
BRL4.4 billion in 2014.
Robust Liquidity and Manageable Debt Maturity Profile:
Gerdau has
low refinancing risk with a debt average life of 5.3 years as of Dec.
31, 2013. The company's cash plus free cash flow to short-term debt
ratio was 1.8x for the period. Short-term debt is expected to remain
manageable in the region of BRL1.5 billion until 2016. Fitch expects the
company to maintain a minimum cash balance of around BRL2.5 billion
providing the company with comfortable liquidity headroom. In addition
to its cash balance, Gerdau has access to undrawn committed credit lines
totaling over BRL3.5 billion with institutions such as BNDES, among
others.
Significant Investment for Iron Ore and Flat Steel Production:
The
company is expected to take appropriate steps to protect its capital
structure and credit metrics during the current investment cycle.
Gerdau's total capex is expected at around BRL2.9 billion in 2014.
Gerdau is investing in expanding its iron ore business, with around 11.5
million metric tons of production to be used for internal purposes at
its Acominas mill in Minas Gerais, and the surplus to be sold at market
prices. For 2013, the company reported its iron ore shipments to be 18.5
million metric tons compared to 2012 shipments of 18.6 million metric
tons. Gerdau is also investing in a flat steel rolling mill at its
Acominas unit that will provide the company with additional rolling
production capacity of up to 1.9 million metric tons per year. This
entry into flat steel will place the company in direct competition with
established Hot Rolled Coil and heavy-plate players such as Usiminas
(IDR 'BB+'/Negative Outlook) and CSN (IDR 'BB+'/Negative Outlook).
RATING SENSITIVITIES
A rating downgrade or Negative Outlook could
occur following a prolonged duration of depressed worldwide demand for
steel products that would fundamentally change Gerdau's medium-term
capital structure. In addition, a change in management strategy with
regards to large debt-funded acquisitions could also negatively affect
Gerdau's credit profile, as would a significant erosion of its liquidity
position. A downgrade could also occur following a sustained
deterioration in the company's long-term credit ratios, particularly if
its long-term net debt to EBITDA ratio trends over 3.0x.
An upgrade or Positive Outlook could be considered following a significant improvement to Gerdau's credit profile with a net debt to EBITDA ratio consistently at around 1.5x alongside consistent strong FCF generation, in addition to optimizing and improving its competitive position globally. The ratings could also be upgraded following the monetization of the company's iron ore assets, with the proceeds being used to deleverage the company significantly in the long term.
Fitch currently rates Gerdau and its wholly-owned debt issuing subsidiaries as follows:
--Foreign currency Issuer Default Rating (IDR) 'BBB-';
--Local
currency IDR 'BBB-';
--National long-term rating 'AA+(bra)'.
Gerdau Holdings Inc.
--Long-term IDR 'BBB-'.
--7.00% notes
'BBB-';
--Proposed joint issue notes due 2024 'BBB-(EXP)'.
GTL Trade Finance Inc.
--Long-term IDR 'BBB-'.
--7.250% notes
'BBB-'.
--7.25% bonds due 2044 'BBB-';
--Proposed joint issue
notes due 2024 'BBB-(EXP)'.
Gerdau Trade Inc.
--Long-term IDR 'BBB-'.
--5.75% notes 'BBB-'.
--4.75%
notes 'BBB-'
Port Authority of the City of St. Paul (MN)
--Solid waste disposal
revs (Gerdau) 2012-7 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology' (Aug. 5, 2013);
--'National Ratings Criteria' (Oct.
30, 2013);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research:
Corporate Rating
Methodology: Including Short-Term Ratings and Parent and Subsidiary
Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
National
Scale Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Evaluating
Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827119
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