CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the long-term foreign and local currency Issuer Default Ratings (IDRs) of Usinas Siderurgicas de Minas Gerais S.A. (Usiminas) to 'BB' from 'BB+' and National Scale rating to 'A+(bra)' from 'AA(bra)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
The downgrade reflects expectations of continued weak steel demand in Brazil, limited profitability in exporting steel, and the oversupply of iron ore making the company's iron ore business unprofitable. These factors combined will result in sustained weaker credit metrics over the medium term. Conflicts at the board of directors level continued to hamper the company's strategic focus and decision-making process. The Stable Outlook reflects Usiminas' strong liquidity position and manageable maturity profile over the medium term.
KEY RATING DRIVERS:
Harsh Operating Environment Challenges Profitability:
Fitch expects Usiminas' profitability will be significantly challenged over the next two years, as sustained suppressed demand for flat steel in Brazil and low margins from its steel exports will result in deteriorating credit metrics. Usiminas managed to report adequate financial results during 2014 despite the difficult operating conditions in Brazil. Domestic steel sales volumes declined 15% as weaker demand levels were experienced across many of Usiminas' end markets. Partially offsetting the decline in domestic demand was an increase in steel exports, particularly to the U.S. and Argentina. Steel volumes exported represented 17% of total volumes sold, and Fitch expects a similar sales mix in 2015.
Unprofitable Iron Ore Business:
Usiminas' exports of iron ore grew by 36% to 680,000 tons in 2014, but were still well below expectations as delays at port operations at Porto Sudeste had a negative impact on export volumes. The company halted iron ore exports in third-quarter 2014 (3Q'14) as prices of iron ore fell below the marginal cost of production. Fitch believes it is not likely that iron ore prices will rise above USD80 per ton in the next two years.
Deteriorating Credit Metrics:
Fitch projects Usiminas' consolidated net leverage to increase above 3.3x as further deterioration of the domestic steel market, limited iron ore cash flow generation, and declining profitability in steel exports will negatively impact the company's financial profile over the medium term. It is also possible Usiminas will need to request a breach waiver for its net leverage covenant of 3.5x during the year. Net leverage increased to 2.1x in 2014 from 1.9x in 2013.
Solid Liquidity Position:
Usiminas has strong liquidity and benefits from a comfortable debt amortization profile as of Dec. 31, 2014. Usiminas had a cash-to-short-term debt ratio of 1.7x, cash and marketable securities of BRL2.9 billion, and short-term debt of BRL1.7 billion. Cash on the balance sheet is enough to cover debt repayments due to mid-2016. Usiminas has maintained its BRL2 billion committed revolver with BNDES for use in capex projects and working capital needs.
Sustained Cost Efficiency Measures:
Usiminas took proactive steps during 2013 and 2014 to effectively lower its costs and become more competitive in the steel industry. The company reduced its SG&A expenses, lowered its reliance on iron ore from third parties, and reduced its use of higher cost raw material inputs in steel production. The company retains its position as the largest flat steel producer in Brazil and is well placed with excess production capacity to swiftly respond to a positive shift in demand, should it occur.
--Negative revenue growth tied to Brazilian GDP expectations;
--EBITDA margins between 10%-12%;
--Year-over-year decline in steel sales volumes sold;
--Sustained cash balance above BRL1 billion in 2015.
Fitch could downgrade Usiminas' ratings if further deterioration in the company's credit metrics result in a Net Debt-to-EBITDA above 4x, and/or funds from operations (FFO) fixed charge coverage ratio below 4x on a sustained basis. A downgrade could also follow deterioration in its comfortable liquidity position because of market conditions leading to 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 2x and/or FFO fixed charge coverage above 7x through the cycle.
Fitch has downgraded the credit ratings of Usiminas as follows:
--Foreign currency IDR to 'BB';
--Local currency IDR to 'BB';
--National scale rating to 'A+(bra)';
--US$400 million notes due 2018 to 'BB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'National Scale Ratings Criteria' (Oct. 30, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage