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Rating Action:

Moody's confirms the Ba1 ratings of Gerdau and Ameristeel; stable rating outlooks

27 Sep 2007
Moody's confirms the Ba1 ratings of Gerdau and Ameristeel; stable rating outlooks

Approximately USD 1 billion of debt instruments affected

New York, September 27, 2007 -- Moody's Investors Service confirmed the Ba1 corporate family ratings of Gerdau S.A. ("Gerdau") and Gerdau Ameristeel Corporation ("Ameristeel"). In addition, Moody's confirmed the Ba1 corporate family rating of the Brazilian operations of Gerdau ("Gerdau Brazil"; represented by Gerdau Acominas S.A., Gerdau Acos Longos S.A., Gerdau Acos Especiais S.A., and Gerdau Comercial de Acos S.A.). The outlook for all ratings is stable. The ratings for Chaparral Steel Company ("Chaparral") were withdrawn as all its rated debt will be retired. These rating actions conclude the respective reviews started on July 11th, 2007 in relation to the announcement that Ameristeel had signed a merger agreement to acquire all of Chaparral's outstanding shares for some USD 4.2 billion in cash.

Ratings confirmed are as follows:

Issuer: Gerdau S.A.

- Ba1 Global Local Currency Corporate Family Rating

- USD 600 million Senior Unsecured Guaranteed Perpetual Notes: Ba1 Foreign Currency Rating

Issuer: Gerdau Brazil

- Ba1 Global Local Currency Corporate Family Rating

Issuer: Gerdau Ameristeel Corporation

- Ba1 Probability of Default Rating

- Ba1 Corporate Family Rating

- USD 405 million Senior Unsecured Regular Bond: Ba1, LGD4 59%

Issuer: Jacksonville Economic Development Comm.

- USD 23 million Senior Unsecured Revenue Bonds guaranteed by Gerdau Ameristeel: Ba1, LGD4 59%

Outlook for all ratings: stable

Chaparral's acquisition, which closed on September 14, 2007, was financed with the proceeds from a USD 2,750 million syndicated term loan and a USD 1,150 million bridge loan (both not rated) issued by GNA Partners, Delaware, and jointly and severally guaranteed by Gerdau S.A., Gerdau Ameristeel Corp., and by the Brazilian operating subsidiaries collectively known as Gerdau Brazil. We expect the bridge loan to be replaced with long-term debt shortly once market conditions are more favorable.

In spite of the significant amount of debt added to Gerdau's consolidated balance sheet, overall credit metrics and liquidity position pro forma for Chaparral remain supportive of its current Ba1 rating. Although Gross Debt to EBITDA will peak at about 2.4x pro forma including twelve months of Chaparral operations, in line with its history of prudent financial management and considering the current up cycle of the industry, Moody's would expect a gradual deleveraging of Gerdau's balance sheet over the near term. Gerdau's liquidity position remains solid based on the maintenance of a hefty cash balance, its available committed liquidity facilities, and ample access to export-related loans. In spite of the increased capex in 2007 and 2008 associated with the Acominas plant expansion program, debt protection metrics are expected to remain strong.

The acquisition of Chaparral expands the product portfolio of Ameristeel with structural steel, and improves its operational diversity and geographic coverage in North America, where it is now the second largest long products producer. Notwithstanding the fact that Chaparral is by far the largest acquisition ever made by Gerdau, associated integration risk is somewhat mitigated by the experience of Gerdau with several acquisitions made in North America over the past several years, including successful negotiations with the local unions and operational improvements that include the increased reliance on the scrap purchase model employed in Brazil. Ameristeel's operating costs are believed to be competitive with other North American minimill-based long products companies.

Moody's believes that Gerdau will continue to play an active role in the ongoing consolidation of the global steel industry and pursue opportunistic acquisitions. While acquisitions made so far have contributed to improved business profile of Gerdau, we note that the event risk associated with the group's acquisitive strategy is a constraining factor to the rating.

Cross default provisions under existing debt agreements provide significant incentive for Gerdau to support its subsidiaries and justify Moody's view of similar credit risk for the rated Group entities. The group's exposure to commodity products, concentration of EBITDA generation in countries with erratic demand for long steel, and the need for further of operational efficiency in North America are also constraining factors to Gerdau's ratings.

Rating Outlook

The stable outlook reflects Moody's view that Gerdau will maintain prudent financial management and a comfortable liquidity position, will continue to focus on the improvement of its cost structure, as well as successfully integrate Chaparral into its North American assets.

What Could Change the Rating - Up

A positive impact on the ratings could result from the successful integration of Chaparral combined with a moderate decline in leverage as measured by Net Debt (considering a minimum cash equivalent position of USD 1.5 billion) to EBITDA below 1.8x on a sustained basis simultaneously with the maintenance of strong credit fundamentals that include efficient cost management and adequate liquidity levels.

What Could Change the Rating - Down

The ratings could be under pressure if Net Debt (considering a minimum cash equivalent position of USD 1.5 billion) / EBITDA grew beyond 2.2x for an extended time period. Also, a sharp deterioration in the group's liquidity position or unsuccessful acquisitions could have an adverse impact on the rating. For the rated unsecured bonds, a substantial increase in the level of secured debt of the guarantors could lead to a downgrade of the respective ratings.

Headquartered in Porto Alegre, Brazil, Gerdau S.A. is the largest long steel producer in Brazil and the second largest in North America, with total capacity of about 22.6 million tons per year of crude steel and consolidated net revenues in excess of USD 15 billion in the trailing twelve months through June 30, 2007, pro forma for Chaparral. The group also has subsidiaries in Chile, Uruguay, Argentina, Peru, Colombia, Mexico and Venezuela, in addition to strategic partnerships in the US, Spain, India and Dominican Republic.

Gerdau Ameristeel is the fourth largest North American steel producer based on tons produced. This position was solidified with the acquisition of Chaparral Steel. Pro forma for the Chaparral acquisition, Ameirsteel will produce approximately 10 million tons of steel from 19 minimills, operate 19 scrap recycling operations, and conduct downstream steel fabricating operations at 54 facilities. Ameristeel's pro forma sales for the12 months ended June 30, 2007 were USD 6.6 billion. Ameristeel is headquartered in Tampa, Florida, and is 66% owned by Gerdau S.A..

Sao Paulo
Richard Sippli
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
55-11-3043-7300

New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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