Fitch Affirms Usiminas' IDRs 'BB+'; Outlook Negative
CHICAGO -- April 26, 2013
Fitch Ratings has affirmed the long-term foreign and local currency Issuer
Default Ratings (IDRs) of Usinas Siderurgicas de Minas Gerais S.A. (Usiminas)
at 'BB+' and national scale rating at 'AA(bra)'. The Rating Outlook is
Negative. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS:
Negative Outlook Linked to Execution of Recovery Plan:
The Negative Outlook reflects the worse than expected profitability of
Usiminas during 2012 and Fitch's expectation of a continued slow recovery for
the Brazilian economy during 2013 as the company continued to post losses into
1Q13. Benefits expected from higher sales volumes due to steel import tariffs
imposed by the Brazilian government in 3Q12 and improved sales mix should
contribute to a degree of recovery, but challenges remain to the company's
ability to recover its operational cashflows to historical levels in the near
term. The delays to the completion of the MMX port, now expected to begin
operations by December 2013, could also constrain volumes of more profitable
iron ore shipments for the year.
Cost Control Improvement is Crucial:
Fitch does not expect credit metrics for Usiminas to recover significantly
during 1H13, as the effect of recent cost efficiencies, steel tariffs, and
better product mix will take time to filter through. The company continued to
operate at a loss in 1Q13, the fifth consecutive quarter it has done so.
Usiminas reported a net loss of BR123 million in 1Q13 compared to a net loss
of BRL37 million in 1Q12. Net losses of BRL531 million were reported in 2012,
and Fitch expects a net loss of about BR150 million for 2013, turning positive
from 2014 onwards.
Total adjusted debt to LTM EBITDA and net adjusted debt to LTM EBITDA ratios
in 1Q13 improved to 9.0x and 4.4x, respectively, from their peaks of 11.0x and
5.1x at year-end 2012 but remain high for the rating category. The
deleveraging reflects modest improvements in EBITDA and a reduction of total
adjusted debt to BRL8.3 billion in 1Q13 from BRL8.8 billion in 1Q12. The spike
in the company's leverage ratios during 2012 was due to a significant decrease
in EBITDA to BRL798mn in 2012 from BRL1.3 billion in 2011. EBITDA was mainly
lower in 2012 due to the reduction of higher cost inventories and
non-recurring items. Actual total adjusted debt decreased to BRL8.7 billion in
2012 from BRL9.5 billion in 2011.
Through-the-Cycle Credit Metrics Deterioration:
The challenging operating environment over the last four years 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 5.4x and 2.5x in 2012 from 3.3x
and 1.4x in 2011, respectively. Coverage ratios have also weakened, as
demonstrated by the company's five-year rolling average FFO fixed-charge
coverage ratio, which fell to 3.9x in 2012 from 6.9x in 2011.
Usiminas has exhibited sustained deterioration in its 'through-the-cycle'
five-year rolling average credit ratios, indicating a structural shift in the
company's credit profile away from strong historical levels. While the company
embarked on cost efficiency measures and structural reorganization, Fitch does
not envisage a return to the company's historical credit profile as seen
during 2006 to 2009 that exhibited long-term net adjusted debt to EBITDA
ratios below 1.5x, in the near term.
Solid Liquidity Position Maintained, Supporting Affirmation:
Usiminas has no liquidity issues and benefits from a comfortable debt
amortization profile as of March 31, 2013. Usiminas had a cash to short term
adjusted debt ratio of 4.1x reflecting cash and marketable securities of
BRL4.2 billion and short term adjusted debt of BRL1 billion. Cash on balance
sheet is enough to cover debt repayments through to 2016, with only BRL520
million due for the remainder of 2013. Total adjusted debt decreased to BRL8.3
billion in 1Q13 from BRL8.8 billion in 1Q12, but leverage ratios increased
during the intervening period due to lower EBITDA generation. The company has
access to a RCF for BRL2 billion with BNDES available for use in capex
projects. Usiminas also has a USD120 million credit facility available with
The most restrictive covenant for Usiminas is its net debt-to-EBITDA ratio of
3.5x. Usiminas received a waiver for the expected breach of this covenant in
December 2012. Fitch's 2013 conservative Base Case scenario indicates the
company's net-adjusted debt to EBITDA ratio will not fall below 3.5x until the
end of 2013. As a result, the company is expected to continue requesting
covenant waivers as needed.
Cash Flows See Recovery in 2012 but Challenges Remain:
Fitch expects to see deterioration in Usiminas' CFFO to around BRL700 million
in 2013 as a result of lower FFO generation and an increase in working capital
requirements. FCF is expected to turn negative once again at the end of the
year by around negative BRL800 million following Fitch's expectation of capex
in the region of BRL1.5 billion. During 1Q13, CFFO was negative BRL98 million
compared to BRL1.2 billion in 4Q12 with the last quarter of 2012 benefitting
significantly from reducing higher cost inventories.
2012 was the first instance of positive FCF generation for the company since
2007. Usiminas generated FFO of BRL2.3 billion in 2012 compared to BRL1.1
billion in 2011. CFFO in 2012 benefited from a working capital inflow of
BRL1.8 billion as higher cost inventories unwound and was strong at BRL4.1
billion. As a result, Usiminas' generated positive FCF of BRL2.1 billion
compared to negative BRL3.5 billion in 2011. FCF was also aided by lower
capital expenditures of BRL1.9 and dividends of BRL94 million in 2012 compared
to BRL2.7 billion and BRL372 million respectively in 2011.
Return to Profitability Key:
Conversely, Usiminas reported improved revenues of BRL12.7 billion in 2012
compared to BRL11.9 billion in 2011, but due to higher operating costs,
non-recurring items, and the impact from higher cost inventories, reported an
EBITDA margin of 6.3% in 2012 compared to 10.6% in 2011. Fitch would consider
revising the Outlook to Stable or upgrading the ratings if there were a
significant improvement in profitability and a sustained return of credit
metrics to through-the-cycle historical levels, with the net adjusted debt to
EBITDA ratio sustained at around 2.5x.
Stagnation of Weak Profile:
Fitch could downgrade Usiminas' ratings if its credit metrics and cash flow
generation remain stagnant at current levels with net adjusted debt to EBITDA
above 4.0x. A downgrade could also follow deterioration in the company's
comfortable liquidity position because of market conditions leading to a
weakening of the company's capital structure.
Fitch has affirmed the credit ratings of Usiminas as follows:
--Foreign currency IDR 'BB+';
--Local currency IDR 'BB+'';
--National scale rating to 'AA(bra)';
--US$500 million Global Medium-Term Note Program to 'BB+';
--US$400 million notes due 2018 to 'BB+'.
The Outlook is Negative.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
National Ratings Criteria
Evaluating Corporate Governance
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Jay Djemal, +1-312-368-3134
Fitch Ratings, Inc.
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