CHICAGO--(BUSINESS WIRE)--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 Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Faster than Expected Improvement in Credit Metrics
Usiminas' continued focus on cost cutting combined with an improvement in Brazil's operating environment and full ramp-up of a more efficient new state-of-the-art galvanized mill allowed the company to exhibit an improved net debt to EBITDA ratio of 2.0x in 2013 compared to 5.8x in 2012. Usiminas experienced a deteriorating cost structure during 2012 that was exacerbated by a high volume of cheaper steel imports, resulting in poor EBITDA margins and high leverage. Usiminas' FFO fixed-charge coverage ratio also improved to 6.1x in 2013 compared to 3.6x in 2012.
Expectation of Normalization in 2014
Fitch projects Usiminas will achieve total adjusted debt-to-EBITDA and net adjusted debt-to-EBITDA ratios of 3.0x and 1.4x in 2014 with steel imports expected at normalized historical levels due to the continued devaluation of the Brazilian Real, and steel import tariffs of 12%. As a result of its effective turnaround, the company has positioned itself back in line with historical profit margins and gross debt of BRL7.1 billion is at the lowest level since 2010. Historically, the main increase in the company's leverage ratios was due to the deterioration in its cash generation.
Successful Undertaking of Cost Efficiency Measures
Usiminas took proactive steps during 2013 to effectively lower its costs and make it more competitive in the steel industry. The company reduced its SG&A expenses, abated its reliance on iron ore from 3rd parties, focused on domestic sales instead of exports, and reduced its use of higher cost raw material inputs in steel production. These initiatives coupled with price increases during 2013 strongly improved Usiminas' margins, and thus returned the company back to historical profitability in the competitive flat steel market.
Return to Historical Profitability
Usiminas reported strong financial results for 2013 which were an improvement from the nadir of 2012 and more consistent with the company's past performance. Adjusted EBITDA improved 159% to BRL1.8 billion for 2013 from BRL697 million for 2012 and EBITDA margins improved to 14.1% for 2013 from 5.5% for 2012. The improvement in profitability can be attributed to the company's successful cost cutting measures, improved product mix, increased domestic market sales, and better prices. 2013 Adjusted EBITDA and margins were the highest the company has reported in the last three years. Fitch projects adjusted EBITDA margins to remain above 15% over the next three years.
Continued Cash Flow Recovery
2013 cash flow from operations (CFFO) was BRL1.1 billion compared to BRL2.4 billion in 2012 which benefited from a working-capital inflow of BRL1.8 billion as higher cost inventories unwound. As a result, Usiminas' generated positive FCF of BRL44 million in 2013 compared to BRL719 million in 2012. FCF for 2013 was aided by lower capital expenditures of BRL956 million compared to BRL1.6 billion for 2012 which was partially offset by an increase of dividends to BRL105 million compared to BRL94 million for 2012. This is the second consecutive positive FCF for Usiminas, and 2012 was the first instance of positive FCF for the company since 2007. Fitch projects Usiminas to generate CFFO of approximately BRL1.8 billion and positive FCF of BRL800 million during 2014 due to strong sales volumes and continued cost cutting efforts during the year.
Solid Liquidity Position Maintained
Usiminas has no liquidity issues and benefits from a comfortable debt amortization profile as of December 31, 2013. Usiminas had cash to short term debt ratio of 2.5x, cash and marketable securities of BRL3.5 billion and short term debt of BRL1.5 billion. Cash on balance sheet is enough to cover debt repayments due to mid-2016. The company cancelled its USD750 million revolver during 2013 as part of its strategy to reduce FX risk. Usiminas has maintained its BRL2 billion committed revolver with BNDES for use in capex projects and working capital needs.
Normalized Steel Imports Allows Stronger Pricing
The flood of steel imports into Brazil declined during 2013 with volumes of 1.9 million metric tons indicating a substantial 43% reduction on 3.4 million metric tons imported during 2012. The peak volumes for imported steel were 5.6 million metric tons experienced in 2010, with more normalized levels at around 2 million metric tons historically. The large reduction in 2013 was aided by the continued devaluation of the Brazilian Real and steel tariffs of 12% imposed by the government, that at one point last year was doubled to 24% temporarily on specific steel products. As a result, steel companies in Brazil negotiated price increases successfully in 2013, and are expected to request new increases during 2014.
Fitch could downgrade Usiminas' ratings if its credit metrics and cash flow generation undergo a sustained level of deterioration as experienced in 2012, with Net Adjusted Debt to EBITDA above 3.5x and/or FFO Fixed Charge Coverage ratio below 3.5x. A downward pressure on the company's operating environment, appreciating Real, increase in steel imports, and/or significant acquisitions could result in a deterioration of the company's comfortable liquidity position and result in a weakening of the company's capital structure.
While a positive rating action is unlikely in the near term, Fitch could upgrade Usiminas if the company sustains strong positive Free Cash Flow, achieves Net Adjusted Debt to EBITDA below 1.2x and/or FFO Fixed Charge Coverage ratio above 9.0x combined with a fundamental shift in product diversification.
Fitch has affirmed the credit ratings of Usiminas as follows:
-- Foreign currency IDR at 'BB+';
-- Local currency IDR at 'BB+'';
-- National scale rating at 'AA(bra)';
-- US$500 million Global Medium-Term Note Program at 'BB+';
-- US$400 million notes due 2018 at 'BB+'.
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
-- 'Corporate Rating Methodology' (Aug. 5, 2013);
-- 'National Ratings Criteria' (Oct. 30, 2013);
-- 'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology -- Effective 12 August 2011 to 8 August 2012
Evaluating Corporate Governance