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Short Sellers Target Brazil’s Usiminas as Debt Balloons

Usinas Siderurgicas de Minas Gerais SA’s rising debt costs and its ranking as the most expensive Brazilian steelmaker are fueling bets the stock may slump further after hitting an eight-year low this week.

The ratio of borrowed shares in Usiminas, an indication of short selling, exceeds 12 percent of floating equity, the highest for any metals and mining company in Brazil, according to data compiled by Bloomberg. Borrowed shares of top Brazilian producer Gerdau SA is 3.45 percent, while the ratio for Cia. Siderurgica Nacional SA is 4.51 percent.

Shrinking demand from the auto industry and a local currency decline that’s inflating the cost of its dollar debt are hurting Usiminas, whose preferred shares fell 46 percent in the past 12 months. After net debt surged about 70 percent in March from a year earlier, Usiminas may sell new equity if debt ratios continue deteriorating, Bank of America Corp. analysts said in a June 5 note to customers.

“There’s no other way than selling shares and increasing capital if Usiminas wants to keep its investment plans,” Jose Luiz Garcia, who helps manage 3.2 billion reais ($1.6 billion) at Rio de Janeiro-based Mercatto Gestao de Recursos, said in a telephone interview. “What we see is a company with low margins, high debt and few prospects of earnings improvement.”

Moody’s Investors Service lowered Usiminas’s credit rating two levels to Ba2 on May 10, making it the first Brazilian company to lose its investment grade this year. The downgrade reflects the “continued deterioration” in the company’s operating results, Moody’s said in a statement at the time.

Usiminas, based in Belo Horizonte, declined to comment on this article when contacted by Bloomberg News.

Highest Valuation

Usiminas is trading 28.5 times analysts’ earnings estimates for this year, the highest of local rivals and No. 3 among 15 global peers tracked by Bloomberg. Gerdau trades at 13.7 times estimates and CSN at 9.8.

Of the 20 analysts who rate the preferred stock and are tracked by Bloomberg, 11 advise clients to sell, while six say hold and three recommend buying Usiminas shares. Three others have put their ratings under review. The company will post 2012 profit excluding some items of 205.5 million reais, the average of 10 analyst estimates in a Bloomberg survey. That would be the lowest annual profit since 2002, when Usiminas had a 367.5 million-real loss before some items.

Usiminas tumbled to an eight-year low on June 19 after Deutsche Bank AG cut the stock to sell, citing “deteriorating earnings,” and Sao Paulo-based Valor Economico newspaper reported that the company may sell shares and assets to raise at least 1.5 billion reais of additional capital. The stock slid 2 percent to 6.90 reais at 10:27 a.m. in Sao Paulo today.

‘Complex Situation’

Regulations in Brazil prohibit so-called naked short selling, when traders short shares without actually taking possession of them. Investors in Brazil borrow stock to use for short-selling, hedging and tax purposes. Short selling allows traders to profit from drops by selling stock and buying it later at a lower price.

“Usiminas is in a very difficult and complex situation, and this is reflected in the figures,” Usiminas Chief Executive Officer Julian Eguren said on an April 24 conference call with analysts.

An 11 percent decline in the Brazilian real against the U.S. dollar in the 12 months ended March 31 caused Usiminas’s foreign-currency debt to balloon, prompting the company to ask bondholders to renegotiate clauses that can trigger an early payment. Local bondholders approved the waiver in a June 11 meeting.


Usiminas committed to keeping local debt less than 4.7 billion reais, dollar debt under $2.2 billion and a cash position of at least 3.5 billion reais. Usiminas had 8.78 billion reais in debt as of March 31, with about 46 percent of it denominated in U.S. dollars, according to an April 23 company statement.

Usiminas’ preferred shares lost 2.2 percent to 7.04 reais yesterday, extending its decline during 2012 to 31 percent. Porto Alegre-based Gerdau gained 21 percent in the period and Sao Paulo-based CSN dropped 18 percent. The Brazilian benchmark Bovespa index is up 0.7 percent this year. Usiminas’s voting shares, the index’s worst performer this year, fell 45 percent.

“We don’t think it is worth it for investors to build a position in Usiminas now,” Daniella Maia, chief analyst at brokerage Ativa SA CTV in Rio de Janeiro, said in a telephone interview yesterday. “If a new share sale really happens, current shareholders will be very diluted.”

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