Fitch Affirms Gerdau's Ratings at 'BBB-'
CHICAGO & RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for Gerdau S.A. (Gerdau):
--Long-term foreign & Local currency Issuer Default Ratings (IDRs) at 'BBB-';
--National scale rating at 'AA+(bra)'.
The Rating Outlook remains Stable.
A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
Geographically Diversified Operations
Gerdau's ratings are supported by its 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. The company also has a heavily flexible production cost structure with 75% of output coming from mini-mills. As a result, the company is able to operate more profitably during periods of lower demand than many of its competitors that rely on blast furnace technology. As of the first quarter of 2014, Gerdau's LTM revenue of BRL41.3 billion was split by operations as follows: North America 30%, Brazil 35%, Latin America (excl. Brazil) 13% and Specialty Steel (incl. Europe) 20%, and Iron Ore 2%.
Stable Capital Structure
The company's investment grade ratings are also 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. Gerdau maintains a commitment to a conservative capital structure, as demonstrated by its public stock offering in April 2011, as it sought to lower its leverage following substantial declines in demand for steel globally. The stability in Gerdau's credit metrics can be seen in the company's five-year rolling average FFO adjusted leverage ratio of 3.5x, which compares well to its global peers. Its five-year rolling average net debt to EBITDA ratio was 2.5x for the period from 2009 through 2013.
Net Leverage Declines
Gerdau 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. Nevertheless, the company's net debt-to LTM EBITDA ratio peaked ratio declined to 2.6x as of March 31, 2014 from 2.9x in 2012. Fitch projects that the company's net leverage will fall in 2014 and 2015. Modest improvements in leverage are anticipated from the following factors: steel price increases, lower SG&A and improvements in working capital. The company has BRL16.7 billion of total debt as of March 31, 2014, which is expected to rise in line with the company's capex program of BRL21.5 billion for, maintenance apex and is expected to remain similar over the next several years. Gerdau generated FFO of BRL3.7 billion and CFFO of BRL4.1 billion during the last twelve months ended March 31, 2014. Fitch's base case indicates a slight improvement in FFO to BRL3.8 billion during 2014.
Robust Liquidity and Manageable Debt Maturity Profile
Gerdau has low refinancing risk with a debt average life of 5.3 years and held over BRL3.5 billion of cash and marketable securities as of March 31, 2014. The current cash balance alone is sufficient to meet all debt repayments due 2016. The company's cash plus cash flow from operations (CFFO) to short-term debt ratio was 4.4x for the period. Short term debt is expected to remain manageable in the region of BRL1.9 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.
A downgrade 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 increased to more than 3.0x on a sustained basis.
An upgrade or positive Outlook could be considered following a significant improvement to Gerdau's credit profile with a net debt/EBITDA ratio 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 ratings as follows:
--Foreign currency IDR at 'BBB-';
--Local currency IDR at 'BBB-';
--National long-term rating at 'AA+(bra)'.
--Gerdau Holdings Inc. 7.00% notes at 'BBB-';
--Gerdau Holdings Inc. & GTL Trade Finance 5.893% notes at 'BBB-';
--GTL Trade Finance Inc. 7.250% notes 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) 2012-7 'BBB-'.
In addition, Fitch has affirmed and withdrawn the following ratings:
--Gerdau Holdings Inc. Long-Term IDR at 'BBB-';
--GTL Trade Finance Inc. Long-Term IDR at 'BBB-';
--Gerdau Trade Inc. Long-Term IDR at 'BBB-'.
These ratings were withdrawn as these entities are no longer considered analytically meaningful for the credit quality of the notes that have been issued out of them. All of the aforementioned notes that have been issued by these special purpose entities were fully guaranteed by Gerdau and the ratings of those issuances remain outstanding.
The Rating Outlook is Stable.
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 ￢ﾀﾓ Effective 12 August 2011 to 8 August 2012
Evaluating Corporate Governance
National Scale Ratings Criteria