Fitch Affirms CSN's Ratings at 'BB+'
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-term foreign and Local currency Issuer Default Ratings (IDRs) of Companhia Siderurgica Nacional (CSN) at 'BB+' and national scale rating at 'AA(bra)'. The Rating Outlook remains Negative. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Strong Business Position
CSN is one of two of the largest flat steel producers in Brazil, with a solid domestic position. Its market share in products such as tinplate and galvanized steel in Brazil is 87% and 37%. CSN's Brazilian market position resulted in a 20% EBITDA margin from its steel division, which compares well with most of its global peers. The company's solid position within the Brazilian steel industry is complemented by its seaborne iron business. CSN exported 21.5 million tons of iron ore (which includes 60% of Namisa) during 2013, nearly 80% of which went to Asia. The company continues to seek to expand its iron or export business. CSN is targeting growth in exports that if successful would lead to a significant increase in exports by 2017. Fitch's base case anticipates exports of approximately 40 million tons during 2017. If CSN's is successful in enhancing its iron ore output, the company's profitability will improve dramatically. Iron ore accounted for about 49% of the company's BRL5.4 billion of EBITDA during 2013.
Growing Leverage Projected
CSN's net debt/EBITDA ratio rebounded to 3.1x for the LTM ended March 31, 2014 from 3.8x in 2012. The company benefited from import restrictions on steel in Brazil, as well as a slight improvement in iron ore prices and a growth in volumes. Combined, these factors led to an improvement in the company's EBITDA to BRL5.4 billion from BRL4.5 billion. Fitch projects CSN's net leverage will stay relatively flat during 2014 as higher volumes are being offset by declining iron ore prices. The company is expected to end 2014 with an FFO adjusted net leverage ratio of approximately 3.8x and a FFO fixed-charge coverage ratio of approximately 2.5x. During 2015 and 2016, the company's net debt/EBITDA ratio should climb to around 3.5x from 3.1x, while its FFO adjusted net leverage ratio should slightly exceed 4.0x. The growth in these ratios is due to Fitch's projection of a decline in iron ore prices to $90 per ton in 2015 and 2016 in its models, as well as heavy capex by CSN on the growth of its iron ore mines.
Solid Liquidity Position despite Negative Free Cash Flow
CSN has low refinancing risk. As of March 31, 2014 CSN held over BRL10 billion in cash and marketable securities. During the next 12 months CSN faces BRL3.4 billion of debt amortizations. CSN has generated consistent negative free cash flow over the years due to heavy investments into its Iron Ore and Steel divisions and high dividend payments. The company generated negative free cash flow of BRL1.1 billion for LTM March 31, 2014 and BRL1.9 billion for 2013. Fitch's base case indicates negative FCF generation of more than BRL 1 billion in both 2014 and 2015 as CSN continues to invest in its iron ore operations.
Strong Pricing to Continue in 2014
The flood of steel imports into Brazil declined during 2013 with volumes of 1.9 million metric tons indicating a 43% reduction from 3.4 million metric tons of steel that were imported during 2012. Historically, the normalized level has been 2 million tons, while the peak volume for imported steel was 5.6 million metric tons in 2010. 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. In 2014, the tariffs are expected to remain in place. Fitch projects this will foster a modest growth in EBITDA to around BRL5.6 billion. A key component of Fitch's forecast is the conservative assumption that iron ore prices will average $100 per ton in 2014.
Fitch could downgrade CSN's ratings if its credit metrics and cash flow generation soften and the company continues to develop its projects at a pace that will result in its net adjusted debt/EBITDA climbing to higher than 3.5x and/or its FFO adjusted net leverage ratio exceeding 4.0x during 2014 and 2015, two years in which capex should exceed BRL2.0 billion per year. A downgrade could also follow deterioration in the company's comfortable liquidity position.
A ratings upgrade is unlikely in 2014 or 2015. A change in the Rating Outlook to Stable could occur if the company brings on iron ore capacity as scheduled and within budget. An upgrade in the longer term would be contingent upon a reduction in the company's net adjusted debt/EBITDA ratio to around 2.0x when iron ore prices are in the range of $90 per ton. An increase in the company's iron ore exports to more than 50 million tons would also be viewed positively.
Fitch affirms CSN's and its subsidiaries ratings as follows:
--CSN Long-Term Foreign Currency IDR at 'BB+;
--CSN Long-Term Local Currency IDR at 'BB+';
--CSN National Long-Term rating at 'AA(bra)';
--CSN Islands IX senior unsecured Long-Term rating 'BB+';
--CSN Islands XI senior unsecured Long-Term rating 'BB+';
--CSN Islands XII senior unsecured Long-Term rating 'BB+;
--CSN Resources S.A. Senior unsecured USD Note Long-Term rating 'BB+'.
In addition, Fitch has also affirmed and withdrawn the following ratings:
--CSN Islands VIII Long-Term IDR 'BB+;
--CSN Islands IX Long-Term IDR 'BB+';
--CSN Islands XI Long-Term IDR 'BB+';
--CSN Islands XII Long-Term IDR 'BB+';
--CSN Resources S.A. Long-Term IDDR 'BB+'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'National Ratings Criteria' (Oct. 30, 2013);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Evaluating Corporate Governance