Fitch Rates Gerdau Trade Inc.'s Proposed Bonds Due 2023 'BBB-'
CHICAGO -- April 8, 2013
Fitch Ratings has assigned a 'BBB-' rating to Gerdau S.A.'s (Gerdau) up to
USD750 million proposed bonds due 2023. The bonds will be issued through
Gerdau's British Virgin Islands incorporated subsidiary, Gerdau Trade Inc.,
and will be unconditionally and irrevocably guaranteed by the company's
Brazilian operating subsidiaries. Net proceeds from the proposed issuance will
be used to refinance pending debt maturities in the longer term, and for
general corporate purposes. A complete list of ratings follows at the end of
this press release.
KEY RATING DRIVERS:
Stable Capital Structure:
Gerdau's investment grade ratings are supported by its commitment to a
conservative capital structure, as demonstrated by its public stock offering
in April 2011 and historically robust liquidity. The stability in Gerdau's
credit metrics can be seen in the company's five year rolling average FFO
adjusted leverage ratio of 3.2x, which is consistent with the peer median of
its rating category, and its five year rolling average net debt to EBITDA
ratio of 2.3x.
Geographically Diversified Operations a Key Strength:
The ratings are also supported by the company's position as the leading
geographically diversified steel producer in the Americas, which cushions
revenues from volatility associated with exposure to any one single country.
As of year-end Dec. 31, 2012, the company's EBITDA of BRL4.2 billion was split
by operations as follows: Brazil 52%,North America 20%, Latin America (excl.
Brazil) 4% and Specialty Steel (incl. Europe) 24%.
The company's significant presence in the US and Brazil also allows it to
arbitrage production between its US and Brazil operations when the BRL
appreciates against the USD, or vice-versa, as it did during 2011. Gerdau's
consolidated steel shipment volumes totaled 18.6 million metric tons during
2012, compared to 19.2 million metric tons in 2011. The shortfall between the
two years was due to lower global steel consumption, partially offset by
increased demand in Brazil. This volume of steel production ranks Gerdau as
the largest long steel producer in the Americas.
Manageable Debt Maturity Profile:
Gerdau has low refinancing risk with a debt average life of 5 years and a cash
plus cash flow from operations (CFFO) to short-term debt ratio of 2.8 times
(x) in 2012. The proposed issuance will help to refinance Gerdau's short term
debt of BRL2.6 billion over the long term. Going forward, the company has a
manageable amortization profile, with debt maturities of BRL1.1 billion in
2014, BRL 1.1 billion 2015 and BRL300 million in 2016.
Fitch expects the company to maintain a minimum cash and equivalents balance
of between BRL2.5 billion and BRL3 billion, which is in-line with historical
practices and provides the company with 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.
Gerdau's total debt-to LTM EBITDA ratio of 3.5x and net debt to LTM EBITDA
ratio of 2.9x are in the higher medium range for the rating category, and are
consistent with the current investment cycle. The company has BRL14.7 billion
of total debt, which is expected to rise in line with the company's major
capex programs, peaking at just over BRL16 billion in 2015. The most
restrictive financial covenant for Gerdau is a total debt to EBITDA ratio of
less than 4.0x. Under Fitch's Base Case scenario, Gerdau comfortably meets
Stable Cash Flows:
Gerdau's ability to generate positive FCF during periods of significant
investments or difficult trading conditions also supports the company's
investment-grade ratings. This was seen during 2010 and 2009 with FCF of
BRL1.8 billion and BRL4.6 billion, respectively, while domestic competitors
mostly reported negative FCF over the same period. In 2012, the company's FCF
was BRL1 billion, after capital expenditures of BRL3.1 billion and dividends
of BRL523 million, compared to FCF of negative BRL802 million in 2011.
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 BRL5.3 billion and CFFO
of BRL4.7 billion during 2012, a strong improvement to FFO of BRL1.5 billion
and CFFO of BRL1.7 billion during the tough operating environment of 2011.
Fitch's base case indicates a conservative 2013 FFO of BRL3.6 billion. Growing
working capital needs should result in CFFO being around BRL3.0 billion. This
level of cash flow generation is expected to maintain a FFO adjusted ratio in
the region of 3.0x that is consistent with the rating category.
The company is expected to take appropriate steps to protect its capital
structure and credit metrics during the current investment cycle that will
total around USD8.5 billion from 2013 through 2017. This figure includes
Gerdau's iron ore business expansion to produce up to 11.5 million metric tons
of iron ore per year by 2014.
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, 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.
A downgrade 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 five
year rolling average credit metrics, particularly if its long-term net debt to
EBITDA ratio reached over 3.0x as a long term average.
Fitch currently rates Gerdau and its subsidiaries as follows:
--Foreign currency IDR 'BBB-';
--Local currency IDR 'BBB-';
--National Long-Term rating 'AA+(bra)';
--Gerdau Holdings Inc. Long-Term IDR 'BBB-';
--Gerdau Holdings Inc. 7.00% notes 'BBB-';
--GTL Trade Finance Inc. Long-Term IDR 'BBB-';
--GTL Trade Finance Inc. 7.250% notes 'BBB-';
--Gerdau Trade Inc. Long-Term IDR 'BBB-';
--Gerdau Trade Inc. 5.75% notes 'BBB-'.
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);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Evaluating Corporate Governance' (Dec. 13, 2011).
Applicable Criteria and Related Research
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
National Ratings Criteria
Evaluating Corporate Governance
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Jay Djemal, +1-312-368-3134
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Joe Bormann, CFA, +1-312-368-3349
Ricardo Carvalho, +55-21-4503-2600
Daniel Kastholm, CFA, +1-312-368-2070
Elizabeth Fogerty, +1-212-908-0526
New York, Media Relations
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