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Rating Action:

Moody's upgrades Gerdau to Ba1; positive outlook

12 Dec 2018

New York, December 12, 2018 -- Moody's Investors Service ("Moody's") upgraded to Ba1 from Ba2 Gerdau S.A. ("Gerdau")'s corporate family rating and the ratings of the debt issues of Gerdau Trade Inc. (guaranteed by Gerdau S.A. and its operating subsidiaries in Brazil) and of GTL Trade Finance Inc. (guaranteed by Gerdau S.A. and its operating subsidiaries in Brazil), as well as the solid waste disposal bonds issued by St. Paul Port Authority, MN (guaranteed by Gerdau S.A.). The outlook for the ratings is positive.

Ratings upgraded:

Issuer: Gerdau S.A

Corporate Family Rating: to Ba1 from Ba2

..Issuer: Gerdau Trade Inc.

USD 750 million senior unsecured notes due 2023: to Ba1 from Ba2

..Issuer: GTL Trade Finance Inc.

USD 1,250 million senior unsecured notes due 2024: to Ba1 from Ba2

USD 500 million senior unsecured notes due 2044: to Ba1 from Ba2

..Issuer: St. Paul Port Authority, MN

USD 51 million solid waste disposal revenue bonds due 2037: to Ba1 from Ba2

Outlook changed to positive from stable

RATINGS RATIONALE

The upgrade to Ba1 reflects Gerdau's better than anticipated operating performance in 2018, which, combined with assets sales and liability management initiatives, allowed the company to intensify its debt reduction efforts and consequently improve credit metrics within a very short timeframe. We expect Gerdau's Moody's adjusted leverage to decline to 2.5 times at the end of 2018 from 5.1 times at the end of 2017. As well, we estimate the company will continue to generate positive free cash flow and strong operating margins in the medium term as a result of its focus on higher-margin products and markets after asset sales carried out in the last four years, cost reduction efforts and financial discipline.

Since the beginning of 2014, Gerdau sold BRL7.4 billion in assets and reduced reported debt by BRL8.2 billion. During 2018, the company raised BRL4.2 billion from asset sales and announced a $1.0 billion (BRL3.8 billion) tender offer for its outstanding 2020, 2021, 2023, 2024 and 2027 notes, which will contribute to additional debt reduction during the last quarter of the year. In addition to supporting a material debt reduction, the asset divestiture program allowed Gerdau to streamline its operations, focusing on the more profitable, core US and Brazilian markets, which will support the company's future profitability. With that, we believe the company has built a significant amount of additional financial flexibility to withstand the cyclicality of the steel industry.

Gerdau's Ba1 ratings are supported by the company's historically solid cash generation, which reflects its strong market position in the several markets where it operates, its good operational and geographic diversity, its cost-driven management, as well as its conservative financial policies. Despite volatile global operating environments and Brazil's economic recession, Gerdau has generated positive free cash flows since 2013, and was able to reduce debt levels, partially with the proceeds from asset divestitures. Constraining the ratings is the company's exposure to the cyclicality of the steel industry, especially in Brazil and the US.

Although Brazil's demand fundamentals remain weak, the company's adjusted EBITDA margins have recovered during 2018, reaching 12.2% in September 2018 (up from 10.9% in 2016). We do not expect any material recovery in the long steel industry in Brazil at least until mid-2019. Construction and infra-structure, the main consuming segments for long steel, will continue to underperform until there are evidences of a sustained economic improvement that may attract investments. Still, economic stability should support a gradual recovery in the commercial construction and homebuilding segments when compared to 2015-16 levels, while the specialty steel segment will continue to post a solid performance due to stronger auto production in the country. In the US, Gerdau will continue to benefit from protectionist policies supporting higher steel prices, but also from its strategy of focusing in higher-margin products, following the sale of the rebar assets. Nevertheless, uncertainties regarding the continuity of such measures add uncertainties to the medium-term competitive landscape, which can impact Gerdau's future operating performance.

The positive outlook reflects our expectations that Gerdau's credit metrics will remain strong in the next 12-18 months, and that the company will continue to strengthen its balance sheet, liquidity profile and financial policies to enhance its credit quality even further.

The ratings could be further upgraded if Gerdau is able to sustain profitability, as measured by EBIT margin, at high single digit (8.0% in LTM ended September 2018), while maintaining strong liquidity and leverage, with total adjusted debt to Ebitda of around 2.5x (3.7x in the LTM ended in September 2018) and EBIT to interest expense above 4.0x (2.7x in the LTM ended in September 2018) on a sustained basis. The maintenance of conservative financial policies would also be required for a rating upgrade.

Negative pressure on the rating or outlook could result from weaker liquidity or from persistently high leverage, with total debt to Ebitda above 3.5x on a sustainable basis over the long-term, and interest coverage (EBIT to interest expense) below 3x. A deterioration in volumes and margins in Gerdau's main markets (namely Brazil and the US), affecting its ability to generate positive free cash flow or limited flexibility for capex and dividend reduction could trigger a downgrade. A sharp deterioration in the controlling shareholders' (Metalúrgica Gerdau) financial position could also precipitate a downgrade.

Based in Brazil, Gerdau S.A. ("Gerdau") is the leading producer of long steel in the Americas and one of the largest suppliers of special long steel in the world, with total capacity of over 21 million tons per year of crude steel and 17.5 million tons per year of rolled products. Its US subsidiary, Gerdau Ameristeel Corporation (Gerdau Ameristeel), is the second largest long steel producer in North America. In the last twelve months through September 30, 2018 Gerdau reported consolidated annual revenues of approximately BRL 45 billion (USD 12.9 billion converted by the average exchange rate). The group has operations in 10 countries with relevant market shares in many of them, among which are Brazil, USA, Canada, Peru, Uruguay, Argentina, Mexico and Venezuela, and joint ventures in Colombia, Mexico and the Dominican Republic.

The principal methodology used in these ratings was Steel Industry published in September 2017. Please see the Rating Methodologies 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 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.

Carolina Chimenti
Asst Vice President - 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
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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