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Rating Action:

Moody's changes Gerdau's outlook to negative; affirms all ratings

06 Oct 2015

New York, October 06, 2015 -- Moody's Investors Service changed the rating outlook for Gerdau S.A. ("Gerdau") and related ratings to negative from stable. At the same time, Moody's affirmed Gerdau's Baa3 issuer rating, and the Baa3 ratings on the foreign currency debt issues of Gerdau Trade Inc (guaranteed by Gerdau S.A. and its operating subsidiaries in Brazil) and on the local currency debt issues of GTL Trade Finance Inc (guaranteed by Gerdau S.A. and its operating subsidiaries in Brazil), as well as the industrial revenue bonds issued by Jacksonville Economic Development Commission (guaranteed by Gerdau S.A.) and the solid waste disposal bonds issued by St Paul (City of) MN, Port Authority (guaranteed by Gerdau S.A.).

Outlook Actions:

..Issuer: Gerdau S.A.

....Outlook, Changed To Negative From Stable

..Issuer: Gerdau Trade Inc.

....Outlook, Changed To Negative From Stable

..Issuer: GTL Trade Finance Inc.

....Outlook, Changed To Negative From Stable

Ratings Affirmed:

..Issuer: Gerdau S.A.

LT Issuer Rating: Affirmed Baa3

..Issuer: Gerdau Trade Inc.:

USD 750 million senior unsecured notes due 2023: Affirmed Baa3

..Issuer: GTL Trade Finance Inc.

USD 1,250 million senior unsecured notes due 2024: Affirmed Baa3

USD 500 million senior unsecured notes due 2044: Affirmed Baa3

..Issuer: Jacksonville Economic Development Comm., FL

USD 23 million industrial revenue bonds due 2037: Affirmed Baa3

..Issuer: St Paul (City of) MN, Port Authority

USD 51 million solid waste disposal revenue bonds due 2037: Affirmed Baa3

RATINGS RATIONALE

The affirmation of Gerdau's Baa3 ratings and change in outlook to negative from stable reflect Moody's view that the company's credit profile and operations remain solid, but incorporate the deterioration in market fundamentals for the steel industry in Brazil, and the continued challenges for the global steel industry. Brazil's recession and continued struggling industrial activity, especially in steel consuming segments such as construction and capital goods, will continue to challenge the steel industry throughout 2015-16. While Gerdau's geographic diversity helps support less volatility in margins, cash flow generation remains skewed towards its domestic operations, which account for about 50% of its total EBITDA. It is therefore highly susceptible to macroeconomic conditions in Brazil. In the US, the strong dollar will continue to attract imports, and steel-consuming industries have mixed trends, with automotive and commercial construction improving, but mining and oil & gas hit by the lower level of investments. Therefore, we should see volatility in this market as well.

Gerdau's Baa3 rating are supported by the company's historically solid cash generation, which reflects its strong market position in the several markets where it operates, its good operational and geographic diversity, its cost-driven management, as well as its conservative financial policies. While Gerdau's variable cost structure, high integration level and large scale provide good operating flexibility, reducing downside risk and translating into historically solid EBITDA margins through the industry's cycles, the economic slowdown in Brazil should keep volumes and margins in the country under pressure over the medium term (but with margins still comparing positively to most steel markets globally). Gerdau's liquidity position remains healthy based on a robust cash position (BRL 5.7 billion at the end of June 2015).

Gerdau's exposure to the cyclicality of the steel industry, which is subject to global and regional supply-demand imbalances and sharp price changes, and a product mix that includes a major proportion of long steel, giving the group a relatively high exposure to the construction industry, are constraining factors for its rating. Also constraining the ratings is the negative perspective for Brazil's economic growth and industrial activity, which should continue to impact Gerdau's domestic sales. Imports remain a threat for the Brazilian operations, but the devaluation of the local currency (BRL) should continue to help hinder imported steel and steel products. The challenges in the global steel industry and the deterioration in Brazil's domestic market will pressure Gerdau's metrics and its cash flow generation ability, leading to an increase in leverage and weakening interest coverage to levels above what is expected to a Baa3 company, thus pressuring the ratings.

Although the likelihood of an upgrade is limited in the next 12 to 18 months, given the challenges faced by Gerdau and its main markets, a stabilization of the outlook could be considered if there is solid demand recovery in Brazil's domestic market, supporting price increases and adjusted EBIT margins returning to levels above 9%. An upward rating movement would require that Gerdau maintains a strong liquidity position and reduces debt levels, with total adjusted debt to Ebitda consistently below 2.5x. An upgrade could also be considered if cash flow from operation less dividends to adjusted debt trends above 30% on a sustained basis.

Negative pressure on the rating could result from weaker liquidity or from persistently high leverage, with total debt to Ebitda not evidencing a trend back to 3x on a sustainable basis over the long-term. Further deterioration in volumes and margins in Gerdau's main markets (namely Brazil and the US), affecting Gerdau's ability to generate positive free cash flow or limited flexibility for capex reduction could trigger a downgrade. A sharp deterioration in the controlling shareholders' (Metalúrgica Gerdau) financial position and an increase in dividends at levels such that the cash flow from operations less dividends to debt ratio remains below 25% for a prolonged period could also precipitate a downgrade.

The principal methodology used in these ratings was Global Steel Industry published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Based in Brazil, Gerdau S.A. is the leading producer of long steel in the Americas , with total annual capacity of over 25.7 million tons of crude steel. The group has operations in 14 countries with relevant market shares in many of them, including Brazil, USA, Canada, Chile, Peru, Uruguay, Argentina, Mexico, Venezuela, Colombia, Spain, India, Guatemala and the Dominican Republic. In the last twelve months ended June 30, 2015, Gerdau reported consolidated annual revenues of approximately BRL 42.8 billion (USD 16 billion converted by the average exchange rate).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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

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.

Barbara Mattos, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes Gerdau's outlook to negative; affirms all ratings
No Related Data.
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