Bond Traders Dismiss CEO’s Pledge as Brazilian Steelmaker Reels

Updated on
Benjamin Steinbruch
Benjamin Steinbruch, CEO of Cia. Siderurgica Nacional, in this Aug. 2010 file photo. Photographer: Fridman/Bloomberg

Cia. Siderurgica Nacional SA’s situation has gotten so dire that Chief Executive Officer Benjamin Steinbruch went on his first investor call in at least five years to offer reassurance.

He promised to cut debt and preserve cash after the steelmaker had its biggest loss in three years and its leverage soared to the highest in more than a decade.

Unfortunately, bondholders weren’t impressed. Since the call on Thursday, CSN’s $1.2 billion of notes due 2020 have plunged 3.4 percent to a record 67.75 cents on the dollar.

Steinbruch failed to inspire confidence in investors who have grown long-accustomed to the company’s missed debt-reduction pledges. They’ve also become increasingly aware of the precarious state of Brazil’s economy, CSN’s biggest market. With analysts predicting the longest recession since 1931, the worry is that demand for flat steel used in making cars will dry up and dent a major source of CSN’s revenue.

“The operating environment is going to be difficult,” John Haugh, a Latin America strategist at Mizuho Financial Group Inc., said from New York. “Whatever the goals are, you have to show that you are taking steps to achieve those goals and that the actual goals are being attained.”

CSN declined to comment on its bonds’ performance.

The Sao Paulo-based company’s net debt has swelled to 20.8 billion reais ($6 billion) -- more than four times the steelmaker’s market value. Its obligations are now 5.6 times earnings before interest, taxes, depreciation and amortization, or ebitda.

Company’s ‘Promise’

“You know that I normally don’t take part in these presentations, but I made the point of being at this one to demonstrate, together with our colleagues, all that we want to do in the shortest period of time possible,” Steinbruch, 62, said on the call. “The company as a whole is focused on preserving cash, reducing indebtedness and improving ebitda margins. That’s our promise.”

Paulo Caffarelli, CSN’s corporate executive director, said on the same call that the company is in talks with creditors to extend the maturity on some of its 7.4 billion reais of debt due in 2016 and 2017.

To JPMorgan Chase & Co., CSN’s leverage ratios are likely headed higher as Brazil’s slump deepens and steel prices sink.

Steel consumption in Brazil sank 24 percent in July from a year ago as industries from car manufacturing to construction shrank. Iron-ore prices have tumbled 20 percent this year.

“The backdrop in domestic steel demand coupled with low iron-ore prices should continue to put pressure on the company’s results,” Rodolfo Angele and Julio Arantes, analysts at JPMorgan, wrote in a report dated Monday.

The price on CSN’s notes due in 2020 have lost 20 percent this quarter, the most among junk-rated basic-materials companies in emerging markets. Yields on the notes have more than doubled in the past year to 16.28 percent, data compiled by Bloomberg show.

“The concern is there,” Mizuho’s Haugh said. “The results deteriorated considerably.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE