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Rating Action:

Moody's downgrades Usiminas to Caa1; ratings remain under review

27 Jan 2016

New York, January 27, 2016 -- Moody's Investors Service has today downgraded the ratings of the senior unsecured notes issued by Usiminas Commercial Ltd. (guaranteed by Usinas Siderurgicas de Minas Gerais, "Usiminas") to Caa1 from B2 and the ratings of the backed senior unsecured global MTN programs of Usinas Siderurgicas de Minas Gerais S.A., Cosipa Commercial Ltd and Usiminas Commercial Ltd to (P) Caa1 from (P) B2. The ratings remain on review for downgrade.

At the same time, Moody's América Latina downgraded Usiminas's global scale rating to Caa1 from B2 and the national scale rating (NSR) to Caa1.br from Ba2.br. The ratings remain on review for downgrade.

Ratings downgraded:

Issuer: Usinas Siderúrgicas de Minas Gerais S.A.

- USD 500 million backed senior unsecured Global MTN Program: to (P) Caa1 from (P) B2

Issuer: Cosipa Commercial Ltd.

- USD 500 million backed senior unsecured Global MTN Program: to (P) Caa1 from (P) B2

Issuer: Usiminas Commercial Ltd.

- USD 400 million senior unsecured notes due 2018, guaranteed by Usiminas: to Caa1 from B2

- USD 500 million backed Global MTN Program: to (P) Caa1 from (P) B2

The ratings are on review for downgrade.

RATINGS RATIONALE

The downgrade to Caa1 reflects primarily the continued deterioration of the market fundamentals for steelmakers in Brazil and Usiminas' diminishing ability to generate cash flow from its operations, which increases liquidity pressures. At the current level of operations and free cash flow generation, it will become increasingly difficult for Usiminas to meet its financial obligations. Usiminas posted negative gross margin in the third quarter of 2015 and announced capacity shutdowns to reduce fixed costs and improve profitability in a lower demand environment. This strategy is currently being implemented and at this point it is uncertain if it will suffice to overcome the contraction of the domestic demand for steel in Brazil and improve the company's free cash flow generation.

Usiminas' operations should remain pressured at least until the end of 2016, as a result of timid economic activity and struggling industrial performance in Brazil, as well as much weaker fundamentals for the domestic steel industry. Furthermore, global oversupply of steel will constrain exports' profitability. This, combined with the impact of the devaluation of the Brazilian real on the company's foreign currency debt (about 48% of total debt) and on its costs, will result in persistently weak credit metrics throughout 2016, particularly margins, leverage and interest coverage

Although Usiminas breached financial covenants applicable to 88% of its total debt at the end of December 2015, the company was able to negotiate waivers, which reduces the risk of debt acceleration in the short term. Historically, Usiminas has been able to maintain an adequate liquidity profile, as evidenced by an adequate cash position (BRL 2.4 billion cash balance at the end of 3Q 2015, sufficient to cover short term debt by 1.3x), but cash balance relative to short term maturities has declined overtime due to weaker cash flow generation, and a substantial part of the company's cash balance is restricted as it is at the subsidiaries and may not be immediately available to meet the company's financial obligations. With the challenging outlook for the steel industry and our expectations that free cash flow generation will remain weak, Usiminas could face liquidity pressures to meet its short term debt.

The ratings remain on review for downgrade reflecting our ongoing concern over Usiminas' ability to meet its short term financial obligations.

Additional negative rating actions can be considered if Usiminas fails to meet short term financial obligations, breaches covenants or enters into a debt restructuring that results in losses to creditors.

Headquartered in Belo Horizonte, Minas Gerais, Usinas Siderurgicas de Minas Gerais S.A. - Usiminas (Usiminas) is the largest integrated flat-steel manufacturer in Latin America, with production of 5.3 million tons of crude steel and consolidated net revenues of BRL 10.4 billion (approximately USD 3.5 billion converted by the average exchange rate) for the LTM period ending September 30, 2015. Usiminas also owns iron ore mining properties, steel distribution and capital goods subsidiaries in Brazil.

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

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 downgrades Usiminas to Caa1; ratings remain under review
No Related Data.
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