Fitch Affirms Gerdau's IDRs at 'BBB-'; Outlook Stable
CHICAGO & RIO DE JANEIRO -- July 18, 2013
Fitch Ratings has affirmed the long-term foreign and local currency Issuer
Default Ratings (IDRs) of Gerdau S.A. (Gerdau) at 'BBB-' and national scale
rating at 'AA+(bra)'. The Rating Outlook remains Stable. A full list of rating
actions 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 FFO adjusted leverage ratio of 3.2x, which compares well
to its regional peers, and its five year rolling average net debt to EBITDA
ratio of 2.3x as of 2012.
Geographically Diversified Operations a Key Strength:
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.
As of the first quarter of 2013, the company's LTM EBITDA of BRL4.0 billion
was split by operations as follows: North America 20%, Brazil 52%, Latin
America (excl. Brazil) 4% and Specialty Steel (incl. Europe) 24%.
Current Leverage Ratios Expected to be at Peak:
Gerdau has faced a difficult trading environment for long steel over the past
two years whereby external factors prevented the company from increasing
prices while raw material costs increased. The company's net debt-to LTM
EBITDA ratio of 3.3x as of March 31, 2013 is high for the rating category, but
is expected to decrease close to 2.5x by 2014, and below 2.0x thereafter by
Fitch. The improvement in this ratio is anticipated from the company's ability
to increase steel prices, extract synergies from a structural reorganization
of its Brazilian assets, improve SG&A as a result of SAP implementation in
2012, lower costs, and improve its cash conversion cycle. The company has
BRL14.9 billion of total debt as of March 31, 2013, which is expected to rise
in line with the company's capex program of BRL8.5 billion from 2013 to 2017,
excluding maintenance capex.
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 2011, the company's FCF
was negative BRL802 million, after capital expenditures of BRL2 billion and
dividends of BRL641 million, but returned to a strong positive position of
BRL1 billion in 2012.
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 BRL5.2 billion and CFFO
of BRL4.6 billion during 2012. Fitch's base case indicates a decline in FFO to
BRL2.5 billion during 2013. Improvements in working capital should result in
CFFO being in the range of BRL3.0 -BRL3.4 billion. This level of cash flow
generation is expected to increase Gerdau's FFO adjusted debt ratio to around
4.0x in 2013, but then decline to more comfortable levels of around 3.0x in
2014 and 2.0x in 2015.
FX Volatility Effects:
During 2013, the company successfully implemented steel price increases, and
if the trading environment remains similar, it may be able to implement
further price increases during 2H13. 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 78% of the
company's debt is denominated in USD as of March 31, 2013, with the BRL
devaluation impacting the company's leverage ratios. The company does have a
substantial natural hedge against FX volatility due to 50% of Gerdau's
revenues generated in USD, and this mitigates the impact to some extent. Fitch
expects the company to generate EBITDA of around BRL4 billion in 2013.
Robust Liquidity and Manageable Debt Maturity Profile:
Gerdau has low refinancing risk with a debt average life of 5.0 years as of
March 31, 2013. The company's cash plus cash flow from operations (CFFO) to
short-term debt ratio was 1.8x for the period, notwithstanding the USD750
million bonds issued by the company during 2Q13 to refinance the pending
maturities. 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 that will
total around BRL8.5 billion, excluding maintenance capex, from 2013 through
2017. Gerdau is investing in expanding its iron ore business, with around 7.5
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. As
of 2012, the company reported its first iron ore shipments of 325,000 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 1.1 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) and CSN (IDR:
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 remains over 3.0x.
An upgrade or positive Outlook for the ratings 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 affirms Gerdau's and its wholly-owned debt issuing subsidiaries ratings
--Foreign currency IDR at 'BBB-';
--Local currency IDR at 'BBB-';
--National long-term rating at 'AA+(bra)';
--Gerdau Holdings Inc. LT IDR at 'BBB-';
--Gerdau Holdings Inc. 7.00% notes at 'BBB-';
--GTL Trade Finance Inc. LT IDR at 'BBB-';
--GTL Trade Finance Inc. 7.250% notes at 'BBB-';
--Gerdau Trade Inc. LT IDR at 'BBB-';
--Gerdau Trade Inc. 5.75% notes at 'BBB-';
--Gerdau Trade Inc. 4.75% notes at 'BBB-'
--Port Auth of the City of St Paul (MN) Solid Waste Disposal Revs (Gerdau)
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com.
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
National Ratings Criteria
Evaluating Corporate Governance
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Jay Djemal, +1-312-368-3134
Fitch Ratings, Inc.
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