Sao Paulo, October 29, 2020 -- Moody's América Latina Ltda., ("Moody's")
affirmed Companhia Siderurgica Nacional (CSN)'s global scale ratings at
B2 and the National Scale Ratings (NSR) at Ba1.br. The outlook
for the ratings was changed to stable from negative.
Ratings affirmed:
- Issuer: Companhia Siderurgica Nacional (CSN)
Corporate Family Rating: B2 (global scale) and Ba1.br (national
scale)
BRL 1.95 billion Senior Unsecured Debentures due 2023: B2
(global scale) and Ba1.br (national scale)
Outlook changed to stable from negative.
For further information on related ratings and Global Scale Rating,
please see the ratings tab on the issuer/entity page for the respective
issuer on www.moodys.com.br
RATINGS RATIONALE
The change in CSN's ratings outlook to stable reflects the company's
better than anticipated operating performance during 2020, resulted
from a favorable price and exchange rate environments for iron ore exports
coupled with a resilient performance of both the steel and cement business
in Brazil during the pandemic. Accordingly, we expect CSN's
annual EBITDA to increase to around BRL9 billion in 2020-21 and
credit metrics to improve in the next 12-18 months, with
adjusted leverage declining to around 4x from 5.3x in the twelve
months ended September 2020. Cash generation will also remain robust,
reducing the bridge gap for refinancing needs in the short-term
and the risk of covenant breaches. CSN has successfully rolled
over BRL2 billion in debt maturities with Brazilian banks during 2020
and the outlook for improved operating performance should facilitate future
extension negotiations with creditors and foster additional liability
management initiatives to address debt maturities in 2021-23,
all of which will help reduce liquidity risks.
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%
(26.4% in the LTM ended September 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 because of an improved cash position
of BRL8.5 billion at the end of September 2020 (including BRL2.2
billion in Usiminas' shares), which is sufficient to cover
debt maturities until 2021 year-end.
However, the ratings remain constrained by the company's highly
leveraged capital structure and significant amount of debt maturing until
2023. Despite the company's debt refinancing efforts that addressed
short-term maturities, gross debt remains high and the company
still has BRL19.5 billion in debt maturing until the end of 2023.
As such, CSN will continue to rely on external liquidity events
or additional debt roll-overs to be able to reduce its debt levels
and refinancing risk in a more structural and meaningful manner.
Brazil's steel demand will retreat in 2020, but not as steeply as
initially thought. IABR, Brazil's steel institute,
revised steel sales forecast for 2020 upward several times, and
now expects only a 3.1% decline, up from an initial
expectation of 20% drop. Steelmakers announced price increases
of about 20-30% in the domestic market during the crisis,
backed by an adjusted supply-demand balance, currency depreciation,
rising prices in China and import-parity discounts. With
that, profitability on steel operations will remain adequate even
with a 40% foreign-exchange depreciation on US-denominated
costs and higher average iron ore prices of about $100/ton so far
in 2020.
In addition, CSN'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, temporarily 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 fully cover debt maturities in 2021-22,
though, and CSN will need to pursue additional alternatives to reduce
refinancing risk.
LIQUIDITY
Since the beginning of 2018, CSN has pursued several initiatives
to address its short-term debt and improve liquidity. In
January 2020, CSN concluded the issuance of $1 billion in
new notes due 2028, and proceeds were 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. In May 2020, CSN
announced the refinancing of BRL1.4 billion in bank debt maturing
in 2020 and 2021 and more recently in October 2020 concluded the roll-over
of BRL600 million in bank debt, which eased liquidity risks for
2020 but did not resolved the refinancing needs for 2021-23.
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. In 2023, the company will also need to address
a $925 million bond maturing in February. In our view,
the concentration of debt maturing in the next three years remains an
important rating constraint, as it exposes the company to the volatility
of access to capital markets, risk aversion and banks' willingness
to refinance debt, and raises liquidity risks for CSN.
In addition to continue pursuing an extension of its debt tenor,
CSN is contemplating additional liquidity events such as the IPO of its
mining subsidiary. If concluded, the IPO would materially
increase the company's cash position, reducing refinancing
risks and supporting future debt roll-overs with creditor banks.
The immediate liquidity benefits CSN would get from the IPO would outweigh
the loss in future cash flows and dividends from the mining subsidiary.
Upon the conclusion of the transaction, we would assess CSN's
resulting liquidity profile and capital structure, and its potential
impact on the company's ratings. Evidences of a sustainably
strengthened financial position after the transaction would put positive
pressure on CSN's ratings.
The stable outlook reflects our expectation that the company's operations
will continue to perform well in the next 12-18 months, allowing
CSN to maintain an adequate liquidity profile and cash generation while
it pursues additional liquidity events and liability management initiatives.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if CSN is able to improve its liquidity
profile and eliminate refinancing risk in the next 12-18 months
either through a material increase in cash position or relevant debt refinancing,
while it maintains an adequate operating performance. An upgrade
would also require total leverage below 4.0x total adjusted debt
to EBITDA and interest coverage ratios (measured by EBIT to Interest expenses)
above 2.5x (2.0x in the twelve months ended September 2020)
on a sustainable basis.
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 deteriorates such that leverage
remains above 5.0x and EBIT/interest below 1.5x.
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.br
for a copy of this methodology.
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), with a sales volume of
32.9 million tons in the twelve months ended September 2020.
The company has operations in other segments, such as cement,
logistics, port terminals and power generation. CSN reported
revenues of BRL26.8 billion ($5.6 billion) in the
twelve months ended September 2020.
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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