New York, June 03, 2020 -- Moody's Investors Service, ("Moody's") affirmed
the B2 ratings assigned to the senior unsecured notes of CSN Islands XI
Corporation, CSN Islands XII Corporation and CSN Resources S.A.
that are guaranteed by Companhia Siderurgica Nacional (CSN). At
the same time, Moody's América Latina affirmed CSN's global
scale ratings at B2 and the National Scale Ratings (NSR) at Ba1.br.
The outlook for the ratings changed to negative from stable.
Ratings affirmed:
- Issuer : CSN Islands XI Corporation
USD 1 billion 6.75% BACKED Gtd Senior Unsecured Notes Due
2028: B2
- Issuer: CSN Islands XII Corporation
USD 1 billion 7.0% BACKED Gtd Senior Unsecured Perpetual
Notes: B2
- Issuer: CSN Resources S.A.
USD 1.2 billion 6.5% BACKED Gtd Senior Unsecured
Notes Due 2020: B2
USD 600 million 7.625% BACKED Gtd Senior Unsecured Notes
Due 2026: B2
USD 925 million 7.625% BACKED Gtd Senior Unsecured Notes
Due 2023: B2
Outlook Actions:
Issuers: CSN Islands XI Corporation, CSN Islands XII Corporation,
& CSN Resources S.A.
Outlook, changed to negative from stable
RATINGS RATIONALE
The change in CSN's ratings outlook to negative reflects our expectation
that the company's refinancing risk will remain high in the next
12-18 months despite the recent efforts to roll-over debt
maturing in 2020, and that credit metrics will remain weak throughout
2020 as a consequence of the steep decline in steel demand in Brazil.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The steel sector has been
affected by the shock given its sensitivity to demand and sentiment.
We regard the coronavirus outbreak as a social risk under our ESG framework,
given the substantial implications for public health and safety.
The affirmation of CSN's B2/Ba1.br ratings reflect the company's
position as a leading manufacturer of flat-rolled steel in Brazil
(Ba2 stable), with a favorable product mix that is focused on value-added
products, and as a major producer of iron ore (second-largest
exporter in Brazil). Historically, the company has reported
a strong Moody's-adjusted EBITDA margin of 20%-30%
(18.5% in the LTM ended March 2020), supported by
its solid domestic market position, wide range of products across
different segments and globally competitive production costs for both
steel and iron ore. The ratings also incorporate the improvement
in the company's short term liquidity because of several measures
taken over the past two years, and our expectations that the mining
segment will continue to support the company's cash generation in
2020.
However, the ratings remain constrained by the company's highly
leveraged capital structure and weakened credit metrics. Despite
the company's debt refinancing efforts that addressed short-term
maturities, gross debt remains high and the company still faces
significant debt maturities in 2021-22. Furthermore,
we expect CSN's credit metrics to remain strained during 2020 and deleveraging
to slow as a result of the impact of the coronavirus outbreak on the company's
steel and cement operations, while its iron ore business will continue
to support cash flow because of high prices and foreign-exchange
rate levels. As such, CSN will continue to rely on external
liquidity events to be able to reduce its debt levels and refinancing
risk in a more structural and meaningful manner.
Since the beginning of 2018, CSN has pursued several initiatives
to address its short-term debt and improve liquidity. More
recently, in January 2020, CSN concluded the issuance of $1
billion in new notes due 2028, and proceeds will be used to fund
a tender offer for the totality of the outstanding notes due in July 2020
and to pay down other existing debt maturing in the short term,
thus lengthening the company's debt amortization schedule. Later
in May 2020, CSN announced the refinancing of BRL1.4 billion
in bank debt maturing in 2020 and 2021, which eased liquidity risks
for 2020, but did not resolved the refinancing needs for 2021-22.
Pro forma to the transaction, CSN's cash position of BRL4.9
billion cover short-term debt maturities by around 1.3x,
compared with a 0.9x coverage at the end of March 2020.
But, despite the improvement, CSN still has sizable debt maturities
of BRL9.0 billion in 2021-22, and will need to pursue
additional alternatives to reduce liquidity pressures and leverage.
Besides the notes maturing in July 2020, CSN's debt maturities until
2022 comprises mainly bank debt, which are easier to be rolled over
based on CSN's long-standing relationship with Brazil's local banks,
namely Caixa, Banco do Brasil and Bradesco. Still,
in our view, the high refinancing need at a time of strained steel
operations, risk aversion and more limited access to external sources
of liquidity raises liquidity risks for CSN.
For 2020, we expect Brazil's steel demand to retreat by around 20%
as the coronavirus outbreak hinders employment and business and consumer
confidence. Brazilian automotive and capital goods sales will decelerate
with lower disposable income and investments, and lockdown requirements
will slow construction, all of which will impact steel sales in
the country. Weak demand will also likely keep Brazil's domestic
steel prices below the import-parity level in 2020, rather
than the typical 5%-10% premium, even with
the depreciation of the local currency. Accordingly, CSN's
operations in the steel segment will remain strained in 2020, while
the company's iron ore operations will remain strong based on current
high prices, relatively stable sales volumes and a favorable exchange
rate for exports. To respond to the steep decline in steel demand
in Brazil, CSN lowered its capital spending and dividends for 2020,
shutdown a blast furnace and will focus on cost reduction, all of
which will contribute to a strong free cash flow generation. The
amount of free cash flow generation will not be sufficient to cover debt
maturities in 2021, though.
The strain we expect on the company's steel business in Brazil and
the depreciation of the Brazilian real will slow CSN's deleveraging
process, keeping adjusted leverage in 2020 near its high level of
5.5x (total adjusted debt/EBITDA) as of year-end 2019 (or
5.0x excluding costs related to the blast furnace revamp).
In the first quarter of 2020, CSN's adjusted leverage increased
sharply to 8.1x, reflecting the impact of the depreciation
of the Brazilian real in the company's US dollar denominated debt without
the corresponding benefit on its foreign currency EBITDA. Even
though we expect some recovery in leverage during the remaining of 2020,
the ratio will only remain more sustainably at levels of around 3.5x-4.0x
if iron ore prices remain at the current high levels while the company's
steel operations recover, or if the company is able to amortize
a substantial amount of debt during the year, none of which we expect
to happen.
The negative outlook reflects our expectation that the company's refinancing
risk will remain high in the next 12-18 months despite its recent
efforts to roll-over debt maturing in 2020, and that credit
metrics will remain weak throughout 2020 as a consequence of the steep
decline in steel demand in Brazil.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings would suffer negative pressure if the company is unable to
roll over debt maturing in 2021-22 on a timely manner, thus
increasing liquidity risks. The ratings could be downgraded if
performance over the next 12 to 18 months does not improve such that leverage
does not moderate to at least 5.0x and EBIT/interest remains below
1.5x.
An upward rating movement would require additional improvements in liquidity
profile and recovery in operating performance. An upgrade would
also be dependent on further adjustments in CSN's capital structure,
with total leverage trending towards 4.0x total adjusted debt to
EBITDA and interest coverage ratios (measured by EBIT to Interest expenses)
above 2.5x on a sustainable basis.
With an annual capacity of 5.9 million tons of crude steel,
Companhia Siderurgica Nacional (CSN) is a vertically integrated,
low cost producer of flat-rolled steel, including slabs,
hot and cold rolled steel, and a wide range of value-added
steel products, such as galvanized sheet and tinplate. In
addition, the company has downstream operations to produce customized
products, pre-painted steel and steel packaging. CSN
sells its products to a broad array of industries, including the
automotive, capital goods, packaging, construction and
home appliance sectors. CSN owns and operates cold rolling and
galvanizing facilities in Portugal, along with long steel assets
in Germany through its subsidiary Stahlwerk Thüringen GmbH (SWT).
The company also has a long steel line (500,000 tons capacity) in
the Volta Redonda plant. CSN is a major producer of iron ore (the
second-largest exporter in Brazil) besides steel, with a
sales volume of 35.3 million tons in the twelve months ended March
2020. The company has operations in other segments too, such
as cement, logistics, port terminals and power generation.
CSN reported revenues of BRL24.8 billion ($6.1 billion)
in the twelve months ended March 2020.
The principal methodology used in these ratings was Steel Industry published
in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1074524.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Moody's National Scale Credit Ratings (NSRs) are intended as relative
measures of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale credit ratings in that they are
not globally comparable with the full universe of Moody's rated entities,
but only with NSRs for other rated debt issues and issuers within the
same country. NSRs are designated by a ".nn"
country modifier signifying the relevant country, as in ".za"
for South Africa. For further information on Moody's approach to
national scale credit ratings, please refer to Moody's Credit rating
Methodology published in May 2016 entitled "Mapping National Scale Ratings
from Global Scale Ratings". While NSRs have no inherent absolute
meaning in terms of default risk or expected loss, a historical
probability of default consistent with a given NSR can be inferred from
the GSR to which it maps back at that particular point in time.
For information on the historical default rates associated with different
global scale rating categories over different investment horizons,
please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309.
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Carolina Chimenti
Asst Vice President - Analyst
Corporate Finance Group
Moody's America Latina Ltda.
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Brazil
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Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
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