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Rating Action:

Moody's places ratings of Gerdau Ameristeel, Gerdau S.A., under review for possible downgrade; places ratings of Chaparral under review direction uncertain

11 Jul 2007
Moody's places ratings of Gerdau Ameristeel, Gerdau S.A., under review for possible downgrade; places ratings of Chaparral under review direction uncertain

Approximately $800 million of debt instruments placed under review

New York, July 11, 2007 -- Moody's Investors Service placed the ratings of Gerdau Ameristeel Corporation (Ba1 corporate family rating -- Ameristeel) and Gerdau S.A. 's (Gerdau) Ba1 corporate family rating under review for possible downgrade. In addition, Moody's affirmed the Ba1 global local currency corporate family rating of the Brazilian operations of Gerdau (represented by Gerdau Acominas S.A., Gerdau Acos Longos S.A., Gerdau Acos Especiais S.A., and Comercial de Acos S.A., collectively referred to as "Gerdau Brazil" for the sole purpose of this report), affirmed the Ba1 foreign currency rating of Gerdau's USD 600 million perpetual bonds guaranteed by "Gerdau Brazil" but changed the outlook for the "Gerdau Brazil" related ratings to developing from positive. At the same time, Moody's placed the ratings of Chaparral Steel Company (Ba3 corporate family rating - Chaparral) under review with direction uncertain. The reviews were prompted by the announcement that Ameristeel has signed a definitive merger agreement to acquire Chaparral for $86.00 per share in cash in a transaction valuing Chaparral's equity at roughly $4.2 billion. The transaction remains subject to a number of approvals, including regulatory and shareholder.

The acquisition, if successful, will likely be funded by a significant amount of new debt. Moody's review for Ameristeel will focus on the composition of its capital structure following the potential merger and the company's overall debt servicing capabilities. Initially, the acquisition will be funded by a bank bridge facility at Ameristeel, although the company has indicated that it will explore an equity issue in order to maintain a reasonable capital structure. Ameristeel's parent, Gerdau, has indicated that it will take its pro-rata share of any potential equity issue by Ameristeel in order to maintain its current level of equity ownership (67%). The proposed transaction would significantly increase Ameristeel's leverage; if fully debt-financed, the company's estimated pro forma LTM Debt/EBITDA would be around 4.0x, using Moody's standard adjustments. Were Ameristeel's Debt/EBITDA to increase beyond 3.0x, its ratings could be downgraded multiple notches.

Chaparral's ratings were placed under review with direction uncertain given the potential benefit that could be derived from having Ameristeel as its parent, and its inclusion in the Gerdau group, as well as the company's continued strong performance. Chaparral's review will focus on the planned capital structure and debt levels that will remain at the company and the potential for Ameristeel to withdraw cash via upstream dividends to service its own debt burden. Moody's also notes that Chaparral's existing notes contain a change of control clause and that the company will have to make a tender offer for the notes. Should Chaparral's debt structure remain no greater than currently exists and should Moody's be comfortable as to the ability of Chaparral to continue to service its obligations from its cash flow, its ratings could be confirmed or upgraded. Should additional debt be placed at Chaparral, thereby requiring greater debt service requirements, the ratings could be downgraded.

The review of Ameristeel's and Chaparral's ratings as well as those of Gerdau will primarily focus on the ultimate level of debt at the respective companies, potential integration risks involved in the transaction, the growth objectives going forward, and the strategic business impact that might result, including Ameristeel's increased presence in the structural market.

Gerdau Brazil should continue to be the group's main cash flow generator after the acquisition, representing close to 50% of pro-forma consolidated EBITDA. Moody's developing outlook for Gerdau Brazil's rating is contingent upon the conclusion of the acquisition of Chaparral by Ameristeel and the clarification of its funding sources, which would allow Moody's to better estimate the possible contingent risk for Gerdau Brazil arising from the potential increase of Ameristeel's leverage.

On Review for Possible Downgrade:

..Issuer: Gerdau Ameristeel Corporation

....Ba1 Probability of Default Rating, Placed on Review for Possible Downgrade,

....Ba1 Corporate Family Rating, Placed on Review for Possible Downgrade, currently Ba1

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently Ba2, LGD5 74%

..Issuer: Jacksonville Economic Development Comm., FL

....Senior Unsecured Revenue Bonds, guaranteed by Gerdau Ameristeel, Placed on Review for Possible Downgrade, currently Ba2, LGD5 74%

..Issuer: Gerdau S.A.

....Ba1 Corporate Family Rating, Placed on Review for Possible Downgrade,

On Review Direction Uncertain:

..Issuer: Chaparral Steel Company

....Ba3 Probability of Default Rating, Placed on Review Direction Uncertain,

....Ba3 Corporate Family Rating, Placed on Review Direction Uncertain, currently Ba3

....Senior Secured Bank Credit Facility, Placed on Review Direction Uncertain, currently Baa3 LGD2 13%

....Senior Unsecured Regular Bond/Debenture, Placed on Review Direction Uncertain, currently B1 LGD4 65%

Outlook Actions:

..Issuer: Chaparral Steel Company

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Gerdau Ameristeel Corporation

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Gerdau S.A.

....USD 600 million guaranteed perpetual bonds Outlook Changed To Developing(m) From Stable(m)

Chaparral, headquartered in Midlothian, Texas, had total consolidated steel shipments of nearly 2.3 million tons and generated revenues of $1.6 billion for the trailing twelve months ended February 28, 2007.

Gerdau Ameristeel, headquartered in Tampa, Florida, produces rebar, merchant bar, structural shapes, wire rod, and flat-rolled steel at its 17 North American mini-mills, and conducts downstream fabrication at about 50 different facilities. The company had sales of approximately $4.7 billion for the trailing twelve months ended March 31, 2007.

Gerdau S.A. headquartered in Porto Alegre, Brazil, is the largest long steel producer in Brazil and the second largest long steel manufacturer in North America, with consolidated net revenues of approximately $12.5 billion for the trailing twelve months ended March 31, 2007.

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

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

No Related Data.
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