Fitch Downgrades CSN's IDRs to 'BB+'; Outlook Negative

  Fitch Downgrades CSN's IDRs to 'BB+'; Outlook Negative

Business Wire

CHICAGO & RIO DE JANEIRO -- July 17, 2013

Fitch Ratings has downgraded the long-term foreign and local currency Issuer
Default Ratings (IDRs) of Companhia Siderurgica Nacional (CSN) to 'BB+' from
'BBB-' and national scale rating to 'AA(bra)' from 'AA+(bra)'. The Rating
Outlook has been revised to Negative from Stable. A full list of rating
actions follows at the end of this release.

KEY RATING DRIVERS

Lower Profitability; Higher Leverage

The downgrade of CSN's ratings is driven by the fundamental and prolonged
change in the competitiveness of Brazilian steel alongside a decline in
seaborne iron ore prices. Combined, these factors have resulted in lower
profitability and correspondingly higher leverage ratios at CSN. While CSN's
operating environment has weakened, the company has not taken corresponding
measures to adjust its capital structure sufficiently.

The Negative Outlook reflects the possibility of the company's adjusted net
debt to EBITDA ratio remaining above 3.5x over the next few years due to CSN's
on-going investment program. Should this net leverage ratio not decrease to
below 3.5x during the next 12 to 24 months, a further downgrade could follow.
If CSN's net debt to EBITDA ratio falls below 3.5x on a sustained basis over
the next four to eight quarters, the Outlook could be revised to Stable.

CSN has indicated that capex will be lower in 2013 at around BRL2.8 billion
compared to the BRL3.2 billion previously announced. This change signals that
steps are being taken by CSN to readjust to more challenging trading
conditions. Even with this reduction in investments, leverage ratios are
expected to remain around current levels by year-end 2013.

Current Leverage Ratios Not Considered a Through-the-Cycle Peak

Fitch's base case indicates an adjusted net debt to LTM EBITDA ratio of
between 3.5x and 4.0x at CSN over the next few years. CSN's adjusted net debt
to LTM EBITDA ratio was 3.8x as of March 31, 2013 compared to 2.4x for the
same period in 2012.

Fitch's Base case indicates a transition of the company's EBITDA margins to
the 20% - 25% range from high levels historically of around 40% due to an
environment of lower pricing and higher operating costs. The weaker
profitability will impact CSN's free cash flow (FCF) flow generation, which
has been negative since 2007 because of the expansion of its Casa de Pedra
mine and other related projects.

Providing comfort to the negative FCF historically has been the company's
extremely large cash position, currently over BRL11 billion. This compares
with short term debt of BRL2.7 billion. As the company's large capex plan
continues, and profitability remains at lower levels than those seen
historically, this large cash position at CSN is expected to decline by almost
half by 2016 under Fitch's base case scenario.

Lower Profitability Expected Going Forward

A perfect storm of lower prices for steel in Brazil and iron ore prices
internationally combined with operating cost inflation has eroded CSN's EBITDA
margin. Margins in the range of 20% - 25% are expected to remain until an
improvement takes place in Brazil's high cost operating environment. In
Fitch's model it uses iron ore prices of around USD110 to USD120 per metric
ton over the next three to four years.

CSN has historically generated high EBITDA margins of around 40% due to its
control over the steel production process, substantial and growing iron ore
operations, and high-value-added steel products. Going forward, EBITDA margins
are expected to be lower at around half of historical levels but still
considerably higher than peers such as Gerdau S.A. (Gerdau, IDR rated 'BBB-'
with a Stable Outlook by Fitch) and Usinas Siderurgicas de Minas Gerais S.A.
(Usiminas, IDR 'BB+'; Negative Outlook) which reported LTM EBITDA margins in
1Q'13 of 9% and 9.8%, respectively.

Large Capex Plan Currently Unchanged Amidst Lower Profitability

While CSN has curtailed non-essential capex for 2013 by around BRL400 million,
there has been no indication of a substantial scale down with regards to the
company's sizeable investment plan over the next four years. These
investments, should they proceed as planned, will total over BRL20 billion
from 2014 to 2017, or around BRL5 billion a year, on average, including
maintenance capex. Investments will be more heavily weighted in 2016 and 2017.
CSN's strategic plan involves Greenfield investments to expand iron ore
production by an additional 20 million metric tons per year (mtpy) by 2019,
building new cement plants by 2017, and a long steel plant in 2014.

CSN's Greenfield investments will take place concurrently with Brownfield
investments to expand its Tecar port capacity from 45 mtpy in 2014 to 84 mtpy
in 2019, expand its Transnordestina railway network by 1,728 km, and increase
output at existing mining operations for Namisa to produce 13 mtpy and Casa de
Pedra to produce 50 mtpy of iron ore per year.

Should the company proceed as planned with these investments, Fitch's base
case indicates consistent negative FCF generation of around BRL1.5 billion on
average annually. CSN's FFO adjusted net leverage increased to over 3.2x in
2012 from 2.0x in 2011, and looks set to increase further to around 4.0x over
the next few years. This high level of FFO adjusted net leverage on a
sustained basis may lead to a further downgrade of ratings.

RATING SENSITIVITIES

The Negative Outlook reflects the likelihood of the company's adjusted net
debt to EBITDA ratio remaining above 3.5x over the next three years due to
CSN's on-going investment program. Should net debt to EBITDA not decrease to
below 3.5x during the next 12 to 24 months, a further downgrade could follow.

If CSN's net debt to EBITDA ratio falls below 3.5x on a sustained basis over
the next four to eight quarters, then the outlook could be changed to Stable
from Negative. For an upgrade to take place the company must demonstrate a
commitment to returning to a capital structure with leverage and debt coverage
ratios similar to those it has exhibited historically, with net debt to EBITDA
below 2.0x, FFO adjusted net debt around 2.0x, alongside positive FCF
generation on a sustained basis.

Fitch downgrades the ratings of CSN and its wholly-owned debt issuing
subsidiaries as follows:

--CSN Long-Term Foreign Currency IDR to 'BB+' from 'BBB-';
--CSN Long-Term Local Currency IDR to 'BB+' from 'BBB-';
--CSN National Long-Term rating to 'AA(bra)' from 'AA+(bra)';
--CSN Islands VIII Long-Term IDR to 'BB+' from 'BBB-';
--CSN Islands VIII senior unsecured Long-Term rating to 'BB+' from 'BBB-';
--CSN Islands IX Long-Term IDR to 'BB+' from 'BBB-';
--CSN Islands IX senior unsecured Long-Term rating to 'BB+' from 'BBB-';
--CSN Islands XI Long-Term IDR to 'BB+' from 'BBB-';
--CSN Islands XI senior unsecured Long-Term rating to 'BB+' from 'BBB-';
--CSN Islands XII Long-Term IDR to 'BB+' from 'BBB-';
--CSN Islands XII senior unsecured Long-Term rating to 'BB+' from 'BBB-';
--CSN Resources S.A. Long-Term IDR to 'BB+' from 'BBB-';
--CSN Resources S.A. Senior unsecured Euro Note Long-Term rating to 'BB+' from
'BBB-'.

The Rating 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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
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=694649

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=796785
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Contact:

Fitch Ratings
Primary Analyst:
Jay Djemal, +1-312-368-3134
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Joe Bormann, CFA, +1-312-368-3349
Managing Director
or
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Senior Director
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