Moody's changes rating outlook for Gerdau and Gerdau Ameristeel to stable from positive
Approximately USD 1,000 million in rated debt securities affected
Sao Paulo, December 19, 2008 -- Moody's Investors Service has revised the ratings outlook for Gerdau S.A.
("Gerdau") and for Gerdau Ameristeel Corporation ("Ameristeel")
to stable from positive, and affirmed the Ba1 corporate family ratings
of both companies and all related ratings. The rating action reflects
the rapid deterioration of the steel industry conditions globally and
our expectations for weakened debt protection metrics for Gerdau and Ameristeel
over the near term.
The significantly weakened global demand for steel and rapidly declining
steel prices resulting from the current economic crisis caused Moody's
to change its outlook for the global steel industry to negative from stable
on November 21, 2008. We believe the current downturn goes
beyond typical cyclical downturns given the underlying severity of the
distress in the global financial markets. Although many producers,
including the Chinese, have shuttered steel making capacity in an
attempt to better match the reduced demand levels, Moody's
believes that steel producers will face increasing challenges in earnings
and cash flow generation that will last for a number of quarters.
With the stress in the global financial system, essential collapse
in demand at this time and prices which may not have bottomed, more
negative pressure persists. However, we recognize that Brazilian
steel producers, in general, should benefit from the recent
devaluation of the Real to partially offset the impact of lower steel
prices on revenues and cash from operations, since local steel prices
take into account the costs for importing steel.
Gerdau is expected to continue to report healthy, but lower,
margins in those markets where it benefits from leading market positions
and a higher level of cost control (namely Brazil and Latin America,
which together represent over 50% of consolidated revenues and
about 65% of EBITDA). However, a more severe impact
is expected to occur on the group's operations in North America
and on the specialty steel business, where the major clients are
global automakers and auto parts manufacturers. The good operational
diversity of Gerdau, namely in Brazil and North America where it
operates several mini-mills, while providing flexibility
for cost reduction during down cycles, is not sufficient to fully
eliminate the expected negative impact on cash flows and, consequently,
debt protection metrics. We expect that the overall debt protection
metrics of Gerdau will likely deteriorate moderately in the coming quarters,
reducing the probability of a near-term reduction in leverage to
a level which Moody's would consider to be more appropriate for
an investment grade rating, including Consolidated Net Debt (considering
a minimum readily available liquidity cushion of USD 1.5 billion)
to EBITDA below 1.8x on a sustained basis.
Gerdau's Ba1 rating continue to be supported by its solid cash generation,
which reflects its strong market position in the several markets where
it operates, its good operational and geographic diversity,
and cost-driven management. The company's acquisitive growth
strategy, exposure to commodity products, and the need for
further improvement in operational efficiency in North America are constraining
factors for its ratings. Moody's recognizes, however,
that acquisitions made so far have contributed to Gerdau's improved business
profile. Gerdau's liquidity position remains solid backed
by BRL 5.5 billion cash balance covering short-term debt
1.7x, in addition to the full availability under its committed
credit facilities totaling USD 1.35 billion.
At this time, Moody's believes the ratings of Gerdau and Ameristeel
should be highly correlated. The factors behind this judgment include
the strong parent support to Ameristeel, demonstrated by an equity
infusion in the recent past, which maintained the parent's 66.5%
ownership, guarantees of Gerdau for approximately 80% of
Ameristeel's debt, and cross default provisions under existing loan
agreements. However, there is no assurance that the two companies'
ratings will move in tandem in the future.
The stable outlook reflects Moody's expectation that Gerdau will
continue to report healthy, although lower, operating margins
in the coming quarters in spite of depressed prices and lower demand for
steel globally, helped by its good operational flexibility and efficient
cost management. We expect Gerdau to reduce the pace of acquisitions
and focus on debt reduction, while prudently managing capex and
preserving robust liquidity.
Upward pressure on the ratings of Gerdau could result from the decline
in leverage as measured by Consolidated Net Debt (considering a minimum
readily available liquidity cushion of USD 1.5 billion) to EBITDA
below 1.8x on a sustained basis during the downcycle simultaneous
with the maintenance of strong credit fundamentals that include efficient
cost management and adequate liquidity levels. An upgrade of Ameristeel's
ratings would also consider the secured nature of its USD 950 million
committed credit facility, which is a limiting factor in achieving
investment grade status.
Conversely, Gerdau's ratings or outlook could come under downward
pressure if Consolidated Net Debt (considering a minimum readily available
liquidity cushion of USD 1.5 billion) to EBITDA (pro-forma
for acquisitions) remains above 2.5x for an extended time period
or in case of a sharp deterioration in the group's liquidity position
or financial performance.
Ratings affirmed are:
..Issuer: Gerdau S.A.
....Ba1 Corporate Family Rating
....Ba1 USD 600 million guaranteed perpetual
..Issuer: Gerdau Ameristeel Corporation
....Ba1 Probability of Default Rating
....Ba1 Corporate Family Rating
....Ba1 USD 405 million Senior Unsecured Guaranteed
Notes due 2011 (LGD 4, 62%)
.Issuer: Jacksonville Economic Development Commission (FL)
.Ba1 USD 23 million Industrial Revenue Senior Unsecured
Bonds due 2037 (LGD4, 62%)
.Outlook: changed to stable from positive for all
Moody's last rating action on Gerdau and Ameristeel occurred on
August 26, 2008, when both companies' outlooks were
changed to positive from stable. The principal methodology used
in rating Gerdau and Ameristeel was Moody's Global Steel Industry
rating methodology, which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Rating
Methodologies subdirectory (October 2005, document #94683).
Other methodologies and factors that may have been considered in the process
of rating these issuers can also be found in the Credit Policy & Methodologies
Gerdau Ameristeel, headquartered in Tampa, Florida,
serves customers in the U.S. and Canada through a vertically
integrated network of 19 minimills, 23 scrap recycling facilities
and 66 downstream operations. The company had net revenues of USD
8.8 billion over the twelve months ended September 30, 2008.
Gerdau S.A., headquartered in Porto Alegre,
Brazil, is the largest long steel producer in the Americas,
with consolidated net revenues of approximately USD 24 billion in the
twelve months ended September 30, 2008.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.