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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.
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
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
Outlook changed to positive from stable
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
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
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.
For ratings issued on a program, series or category/class of debt,
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MD - Corporate Finance
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Moody's Investors Service, Inc.
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