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Rating Action:

Moody's upgrades Gerdau to Baa3; outlook stable

02 Dec 2011

USD 23 million in rated debt securities affected

New York, December 02, 2011 -- Moody's Investors Service upgraded to Baa3 from Ba1 the ratings of Gerdau Ameristeel's 5.3% Industrial Revenue Bonds due May 2037, issued by Jacksonville Economic Development Commission, which bonds are guaranteed by Gerdau S.A. (Gerdau). At the same time, Moody's assigned a Baa3 Issuer Rating to Gerdau and withdrew Gerdau's corporate family rating of Ba1 on the global scale. The rating outlook is stable. This concludes the rating review which began on March 22, 2011.

RATINGS RATIONALE

The upgrade reflects the improved financial condition of the company following its successful equity issuance in April 2011 through which Gerdau raised approximately BRL 3.6 bn, and the resulting improved liquidity position and declining leverage. As of September 30, 2011 total cash position was BRL 4.3 bn and leverage, expressed by Net Adjusted Debt to LTM Adjusted EBITDA (considering a minimum cash position of USD 1.5 bn) was at 2.9x, a level which we believe will be sustained even as the company continues to execute its large investment program and faces margin pressure coming from higher costs and weaker pricing in Brazil. From a strategic perspective, the ongoing investments for greater self-sufficiency of key inputs (namely iron ore) should improve margins and the overall competitiveness of Gerdau over the near to medium term. Potential monetization of iron ore assets may benefit the company's liquidity. Gerdau's scale, business profile, and good diversification, together with its low cost minimill operating structure with a high proportion of variable costs, are also supportive of the rating.

Gerdau's Baa3 rating is supported by its historically solid cash generation, which reflects its strong market position in the several markets where it operates, its good operational and geographic diversity, and cost-driven management. While Gerdau's variable cost structure, high integration level and large scale provide good operating flexibility, reducing downside risk and translating into historically solid EBITDA margins through the industry's cycles, structural changes in the Brazilian steel industry leading to increased imports should keep margins under pressure over the near term (but still comparing positively to most international peers). We would expect margins to somewhat recover once ongoing investments in product mix improvement and cost reduction are completed within the next couple of years. Gerdau's liquidity position remains healthy based on robust available cash position and availability under sizable committed credit facilities, adequate debt maturity profile, and access to export-related and BNDES loans. Gerdau's exposure to the cyclicality of the steel industry, which is subject to global and regional supply-demand imbalances, trade flows and sharp price changes, and product mix that includes a high proportion of long steel, giving the group a relatively high exposure to the construction industry, are constraining factors for its rating.

The stable outlook reflects Moody's expectation that structural changes in the Brazilian steel sector will result in lower (but still comfortable) margins going forward, helped by its good operational flexibility and efficient cost management. As a result, leverage as measured by Net Adjusted Debt to Adjusted EBITDA (considering a minimum cash position of USD 1.5 bn) is expected to remain below 3.0x in the coming quarters. In the medium term, margins should benefit from the ongoing investments in product mix improvement and cost reduction. The stable outlook also considers that capex and liquidity will continue to be prudently managed, and that Gerdau will focus on debt reduction.

Upward pressure on Gerdau's ratings or outlook could be considered if Net Adjusted Debt to EBITDA (considering a minimum cash position of USD 1.5 bn) decreases further and stays below 2.0x during the execution of its capex program, with the maintenance of strong liquidity levels. An upgrade would also be considered if Free Cash Flow to Adjusted Net Debt stays in the mid-teens on a sustained basis.

Though not anticipated in the near term, negative pressure on the rating or outlook could result from weaker liquidity or from persistently high leverage,with Net Adjusted Debt to Adjusted Ebitda above 3x for an extended time period or in case of a sharp deterioration in the group's liquidity position or financial performance.

Upgrades:

..Issuer: Jacksonville Economic Development Comm., FL

....Senior Unsecured Revenue Bonds, Upgraded to Baa3 from Ba1, guaranteed by Gerdau S.A.

Outlook Actions:

..Issuer: Gerdau S.A.

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

Withdrawals:

..Issuer: Gerdau S.A.

.... Corporate Family Rating, Withdrawn, previously rated Ba1

..Issuer: Jacksonville Economic Development Comm., FL

....Senior Unsecured Revenue Bonds, Withdrawn, previously rated LGD4, 63%

Please see ratings tab on the issuer/entity page on Moodys.com for the last credit rating action and the rating history.

The principal methodology used in rating Gerdau S.A. was the Global Steel Industry Methodology published in 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Gerdau S.A. is the largest long steel producer in the Americas and the second largest globally, and also a leading player in the specialty steel industry worldwide, with total capacity of about 26 million tons per year of crude steel and 23 million tons per year of rolled products. Gerdau North America is the second largest long steel producer in North America. In the last twelve months ended September 30, 2011, Gerdau reported net revenues of about USD 20.7 billion. The group has operations in 14 countries, including Brazil, USA, Canada, Chile, Peru, Uruguay, Argentina, Mexico, Venezuela, Colombia, Spain, India, Guatemala and the Dominican Republic.

The Local Market analyst for this rating is Barbara Mattos, 5511-3043-7357

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 31 January 2012. ESMA may extend the use of credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, if ESMA decides that exceptional circumstances arise that may imply potential market disruption or financial instability. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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Carol Cowan
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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SUBSCRIBERS: 212-553-1653

Moody's upgrades Gerdau to Baa3; outlook stable
No Related Data.
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