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Rating Action:

Moody's affirms CSN's B2 ratings; changes outlook to negative

03 Jun 2020

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.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carolina Chimenti
Asst Vice President - Analyst
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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