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Rating Action:

Moody's downgrades CSN to Caa2; outlook remains negative

17 Jul 2017

New York, July 17, 2017 -- Moody's Investors Service (Moody's) has downgraded to Caa2 from Caa1 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 rating to Caa2 from Caa1 and the National Scale Rating (NSR) to Caa2.br from B3.br. The outlook remains negative.

Ratings downgraded:

- Issuer: CSN Islands XI Corporation

USD 750 million 6.875% BACKED Senior Unsecured Notes Due 2019: to Caa2 from Caa1

- Issuer: CSN Islands XII Corporation (Cayman Islands)

USD 1 billion 7.0% BACKED Senior Unsecured Perpetual Notes: to Caa2 from Caa1

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

USD 1.2 billion 6.5% BACKED Senior Unsecured Notes Due 2020: to Caa2 from Caa1

The outlook for all ratings remains negative.

RATINGS RATIONALE

The downgrade reflects the tight liquidity position faced by CSN, which is exacerbated by the fact that CSN has not yet filed audited financial statements for fiscal-year 2016 and our concern about potential liquidity pressures that could arise as a consequence. Moody's acknowledges that the company is focusing on actions that are under its control and working with its auditor to release these statements over the next few months.

On 27 March 2017 CSN announced that it would postpone the filing of audited financial statements related to the 2016 fiscal year. The reason was the review of the accounting treatment determined upon for the transaction carried out by CSN on November 30, 2015 for Congonhas Minérios, which resulted in the business combination of mining and related logistics assets. This review will impact the financial statements for the fiscal year ended on December 31, 2015, and will consequently impact the opening balances for 2016.

Even though CSN has released selected operating indicators for FY 2016 and 1Q17 on March 28 and May 15, respectively, the company is not in compliance with CVM and SEC reporting regulations, as well as under the terms of various debt agreements, which include the provision of audited annual statements by March 31st and April 30th, 2017. CSN has been working with creditors which have notified the company and has obtained waivers from them accommodating the delay. An extended delay carries the risk that creditors could take actions that lead to a declaration of technical default, followed by payment acceleration after the relevant cure period under the particular agreement. Besides, the lack of audited financials limit the availability of adequate, verified financial information to monitor the ratings.

The Caa2 ratings reflect primarily the challenges faced by CSN in its key markets and segments and the likelihood that CSN's credit metrics will slowly recover in the next 12 to 18 months, as well as its unsustainable capital structure. Accordingly, the company will need to rely either on asset sales, a capital increase or a debt refinancing to reduce debt levels. Although 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 as a leading manufacturer of flat-rolled steel in Brazil, with a favorable product mix focused on value-added products, CSN's ratings are primarily constrained by its weakened credit metrics, namely high leverage, low interest coverage and deteriorated cash flow metrics. Still, we expect to see some improvement supported by a gradual recovery in Brazil's steel industry and higher iron ore prices compared to the low levels observed in late 2015/early 2016.

CSN had BRL5.4 billion in cash at the end of September 2016, and BRL 5.1 billion at the end of March 2017. Although liquidity is adequate to meet financial obligations during 2017 - about BRL 1.5 billion of debt amortizations, liquidity risk has increased, as there are substantial debt amortizations from 2018 onwards. Accordingly, CSN has BRL 5.6 billion in total debt amortizations in 2018, BRL 7.2 billion in 2019 and BRL 8 billion in 2020, including bank debt and bonds. The company announced in 2015 the extension of BRL 2.57 billion of debt coming due in 2016 and 2017 with Caixa Economica Federal to 2018 through 2022, and BRL 2.2 billion of debt coming due in 2016 and 2017 with Banco do Brasil to 2020 through 2022. These instruments will start to mature in 2018. Besides, CSN has USD1.95 billion in bonds maturing in 2019-20. The company has been working with main creditors to address those maturities and lengthen its amortization schedule, which, if successful, will reduce the liquidity pressure. However, this process may be delayed until CSN files audited financial statements.

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. The outlook also reflects the heightened liquidity risks faced by CSN and its unsustainable capital structure in a period of constrained cash flow generation.

The ratings could suffer additional negative pressure if the company enters a debt restructuring process that entails significant losses to creditors.

An upward rating movement would require CSN to adequate its capital structure, with adjusted leverage trending towards 6.5x total adjusted debt to Ebitda and interest coverage ratios (measured by EBIT to Interest expenses) remain above 1.5x on a sustainable basis. An adequate liquidity profile and operating performance would be further considerations in a rating upgrade or outlook change.

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

With an annual capacity of 7.1 million tons of crude steel, Companhia Siderúrgica 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 the U.S. and 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. Besides steel, CSN has operations in other segments, such as iron ore, cement, logistics, port terminals and power generation assets. CSN has not yet reported 2016 and 1Q17 audited financial statements, but preliminary figures indicate revenues of BRL 17.7 billion in the last twelve months ended March 2017 (USD 5.4 billion).

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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