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Rating Action:

Moody's revises Magnesita's outlook to positive

Global Credit Research - 20 Sep 2013

Approximately USD 400 million in rated debt securities affected

Sao Paulo, September 20, 2013 -- Moody's Investors Service has today affirmed Magnesita's global scale ratings at B1 and upgraded the national scale ratings to Baa1.br from Baa2.br. The outlook changed to positive from stable. The change in outlook reflects Magnesita's continued deleveraging trend even during investment cycles, proven margin resilience to downturns in the steel industry and maintenance of solid liquidity over the past four years.

Ratings as follows:

Issuer: Magnesita Refratários S.A.

Corporate Family Rating: B1 (global scale); Baa1.br (Brazilian national scale)

Issuer: Rearden G Holdings Eins GmbH (Germany)

USD 400 million senior unsecured guaranteed notes due 2020: B1 (foreign currency)

The outlook for all ratings is positive.

RATING RATIONALE

"The change in the ratings outlook to positive reflects primarily Magnesita's ability to post stable adjusted Ebitda margins in the 18% - 19% range during 2012 and 2013, even as most steelmakers in Brazil struggled with rising input costs and competition from imports", says Moody's Vice President -- Senior Analyst Barbara Mattos. The change in outlook reflects Moody's expectations that Magnesita's leverage will continue to decline (total adjusted leverage of 4.7x in the LTM ending June 2013 and we expect leverage to decline to 4.5x at the end of 2014, despite the capex planned for the year), and that the company will manage capex and dividend distribution to preserve its capital structure. The positive outlook also factors in Magnesita's strong liquidity, sufficient to cover debt amortizations through mid 2017.

Magnesita's good geographic diversity, strong market position, long-standing client relationships and the significant import barriers in Brazil due to complex logistics and infrastructure also support the ratings. The high level of vertical integration in Magnesita's operations, including sizeable prime-quality mineral reserves, and efficient logistics are additional credit positives.

Offsetting these positive aspects are Magnesita's relative small size in a fragmented industry, large capex plans - which are likely to result in negative free cash flow generation in the next years - and the still concentrated nature of Magnesita's operations, which relies heavily on Brazil and on the steel sector. Revenues generated in Brazil have declined though, from levels above 50% to 38% today. The relevance of the steel industry in Magnesita's refractories revenues has also declined (to 83% today from historical levels above 90%), and should continue to diminish as the company pursues its diversification strategy.

The positive outlook reflects Moody's expectations that, despite the challenges faced by the steel industry worldwide, Magnesita will continue to focus on debt reduction and on margin improvement while maintaining sizeable liquidity and comfortable headroom on financial covenants. Magnesita's vertical integration process will benefit overall margins allowing the company to continue its deleveraging process at the same time it captures the synergies of CPP contracts in Brazil and abroad. The outlook incorporates the expectation that Brazilian operations will remain the key cash flow generator over the medium term, followed by the United States. The positive outlook also reflects our expectations that the company will prudently manage dividends and future acquisitions that may eventually happen in order to maintain a healthy liquidity position and continue to deleverage its balance sheet.

Magnesita's ratings could be upgraded if total adjusted debt to adjusted EBITDA declines to below 4.5x (4.4x as of June 30, 2013 LTM (3-year average)) and free cash flow to total adjusted debt remains close to 10% (5.2% as of June 30, 2013 LTM (3-year average)) while maintaining healthy liquidity position.

The ratings or outlook of Magnesita could be downgraded if debt protection metrics are not sustainable over time, particularly if free cash flow turns negative without prospects of improvement and total adjusted debt to adjusted EBITDA remains above 5.0x on a sustainable basis (4.4x as of June 2013 LTM (3-year average)). Deterioration in Magnesita's liquidity arising from debt-funded acquisitions could also have negative implications to the rating or outlook.

The principal methodology used in rating Magnesita was Moody's Global Mining Industry rating methodology (May 2009). Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

Magnesita Refratários S.A. ("Magnesita") is a vertically integrated low-cost producer of refractories used in the steel, cement and glass manufacturing process, among others. Magnesita is the largest manufacturer of refractories in Latin America and the third largest worldwide. Besides Brazil, Magnesita has operations in USA, Europe and Asia. Magnesita reported consolidated net revenues of BRL 2.5 billion in the last twelve months ended June 30, 2013.

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
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 Waltz, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Releasing Office:
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

Moody's revises Magnesita's outlook to positive
No Related Data.

 

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