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Rating Action:

Moody's downgrades CSN to Ba2; outlook negative

29 Apr 2015

New York, April 29, 2015 -- Moody's Investors Service (Moody's) has today downgraded to Ba2 from Ba1 the foreign currency rating 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 downgraded CSN's global scale local currency rating to Ba2 and the National Scale Rating (NSR) to Aa3.br from Aa1.br. The outlook changed to negative from stable. For further information, please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br

The downgrade reflects the deterioration in market fundamentals for the steel industry in Brazil and, more recently, for iron ore, the main operations of CSN (88% of total revenues and 86% of FY 2014 EBITDA). Steel demand levels, steel prices and iron ore prices are expected to remain under pressure and as a consequence, CSN's credit metrics, particularly leverage (due to the lower Ebitda), interest coverage and cash flow metrics will continue to be challenged. Even with a reduction in capex in 2015 and lower dividend payout from 2015 onwards, the cash generation ability of CSN will be diminished given the outlook for weak steel and iron ore market fundamentals through 2015 and at least 2016 for iron ore.

Ratings downgraded:

- Issuer: CSN Islands XI Corporation

USD 750 million 6.875% Senior Unsecured Notes Due 2019: to Ba2 from Ba1

- Issuer: CSN Islands XII Corporation (Cayman Islands)

USD 1 billion 7.0% Senior Unsecured Perpetual Notes: to Ba2 from Ba1

- Issuer: CSN Resources S.A. (Luxembourg)

USD 1.2 billion 6.5% Senior Unsecured Notes Due 2020: to Ba2 from Ba1

The outlook for all ratings is negative

RATINGS RATIONALE

CSN's Ba2 rating reflects its position as a leading manufacturer of flat-rolled steel in Brazil, with a favorable product mix focused on value-added products. Historically, the company has reported a strong EBITDA margin (as defined by Moody's) in the 35-40% range, supported by its solid domestic market position, wide range of products through different segments and globally competitive production costs both in steel and iron ore. Even after the steel market downturn caused by the financial crisis in 2008, margins have been relatively high compared to steel peers as mining benefited from higher iron prices in the past few years. However, lower iron ore prices and the challenging operating environment for steelmakers impacted CSN's adjusted EBITDA margins, which declined from 46.9% in 2010 to 29.9% in 2014.

CSN's operational efficiency and low costs reflect the large scale of its integrated steel mill, its own captive iron ore mine and its self-sufficiency in electricity and 57% self-sufficiency in coke. Also supporting CSN's high margins are the company's strategic location in the most industrialized region of Brazil and its proximity to high-grade iron ore reserves and port terminals, as well as its efficient logistics.

While we believe that the company is better-positioned than most of its global peers to face the ups and downs of the cyclical steel industry from an operational standpoint, CSN's ratings are primarily constrained by its track record of high shareholder returns, low operational diversity, with 84% of its crude steel production in a single site, and by risks associated with its large capex program mainly to expand iron ore mining, but also cement and logistics operations. In addition, the rating also incorporates increased challenges facing the steel industry in Brazil due to reduced expectations for GDP growth, competition from imported steel and steel-made products as well as a increased volatility in iron ore prices, which should keep CSN's margins and leverage under pressure.

The negative outlook reflects our expectations that market conditions for steel producers in Brazil and iron ore producers globally will remain challenging, with further risk to the downside, and that credit metrics will likely remain pressured for the next 12 to 18 months.

Although the likelihood of an upgrade is limited in the next 12 to 18 months, given the challenges faced by CSN and its main operations markets, an upward rating movement would require that CSN maintain a strong liquidity position and acceptable leverage during the execution of its large capex program, and EBIT margins above 8%. In addition, a sustainable (cash from operations less dividends) to debt ratio of at least 20% as well as a less concentrated operational risk profile would be further considerations in a rating upgrade or outlook change, as would further actions taken by the company to reduce its high leverage and improve interest coverage metrics.

The ratings or outlook could suffer negative pressure should conditions in key markets for CSN, such as automotive, construction and home appliances, remain weak, leading to lower profitability, measured by an adjusted EBIT margin consistently below 5%, and dividends remain high such that the (cash from operations less dividends) to debt ratio remains below 15% for a prolonged period. Downward pressure could also affect the ratings or outlook if the company is unable to reduce its leverage, and interest coverage (measured by EBIT to interest) stays at levels below 3x on a sustained basis. A marked deterioration in the company's liquidity position could also precipitate a downgrade.

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

Companhia Siderúrgica Nacional ("CSN") is a vertically integrated, low-cost producer of flat-rolled steel, long-steel, iron ore and cement. With an annual capacity of 6.7 million tons of crude steel, 6.0 million tons of rolled products and 1.6 million tons of long steel, 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 the U.S. and long steel assets in Germany, besides substantial iron ore, limestone, dolomite and tin reserves, railroads, port terminals and power generation assets. In 2014, CSN reported consolidated net revenues of BRL 16.1 billion (USD 6.85 billion converted at 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
Vice President - Senior 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: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Marianna Fernandes Rodrigues Waltz
Associate Managing Director
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 downgrades CSN to Ba2; outlook negative
No Related Data.
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