CHICAGO--Fitch Ratings has downgraded the Long-term Foreign and Local currency Issuer Default Ratings (IDRs) for Companhia Siderurgica Nacional (CSN) to 'B-' from 'B+'. In addition, Fitch downgrades the company's National scale rating to 'BBB-(bra)' from 'A-(bra)'. The Rating Outlook remains Negative. A full list of rating actions follows at the end of this release.
Factored into the rating downgrade is Fitch's view that CSN's capital structure is unsustainable under current market conditions. Asset sales will prove challenging and likely to plug the cash flow gap in 2016 and 2017. With approximately 35% of its total debt attributed to capital market liabilities, CSN could struggle to refinance this debt before it comes due in 2019 and 2020.
Fitch doesn't envision CSN generating consolidated EBITDA at its historic levels of BRL4.5 billion - 6.0 billion in the near term. Iron ore fundamentals are likely to deteriorate further with additional supply coming online from major low cost producers coupled with a slowdown in economic activity in China, and further depreciation in the Chinese yuan. CSN's iron ore operations have benefited from the depreciation of the Brazilian real and the sale of higher grade ore products. However, weakening in the sector going forward will continue to put downward pressure on CSN's mining operations. Based on Fitch's mid-cycle iron ore price assumptions, CSN will generate BRL1.1 billion in iron ore EBITDA in both 2016 and 2017 compared to BRL4.2 billion in 2011 when average iron ore prices were USD170 per ton.
Fitch expects CSN to face a further decline in domestic steel volumes during 2016. CSN will likely continue to compensate for its lost domestic volumes by continuing to export its products overseas. However, the oversupply of steel globally will continue to weigh heavily on the sector resulting in limited domestic price recovery and poor profitability from exports. CSN's decision to temporarily shut down its primary steel making activities at its Presidente Vargas blast furnace should provide some relief to the company's working capital drain in 2016.
KEY RATING DRIVERS
Challenges to Persist
Headwinds faced by CSN have materially impacted the company's credit profile to an unprecedented level. The sharp drop in iron ore prices, collapse in Brazilian steel demand, and rising benchmark interest rates have all contributed to the multiple downgrades in CSN's Issuer Default Rating. These three variables are not expected to improve materially in 2016, hindering CSN's ability to generate significant operating cash flow and will ultimately reduce debt levels.
Cash Flow Under Pressure
Negative pressures on CSN's cash flow are not expected to abate in 2016. CSN generated operating cash flow of BRL4.2 billion in 2011, BRL2.5 billion in 2012 and BRL2.2 billion in 2013 when average iron ore prices per ton were USD170, USD130, and USD135, respectively. Fitch's revised iron ore price assumption for 2016 of USD45 per ton results in a situation where CSN will have difficulty generating positive cash flow from operations absent a turnaround in domestic steel volumes going forward.
Asset Sales Paramount to Survival
CSN's decision to divest several of its noncore assets is crucial in order to avoid a debt restructuring. Potential divestments by CSN include its Tecon container terminal, hydroelectric generation assets, equity holdings of Usiminas (14.13% of common shares and 20.68% of preferred shares) and nonvoting shares in MRS Logistica. Fitch estimates the combined value of these assets to be BRL4.0 billion - BRL6.0 billion. Fitch believes monetizing these assets for maximum value will be extremely challenging in the current environment.
Drowning in Debt Service
Fitch projects CSN's interest coverage ratios to remain below 1.0x the next three years, as the company will be unable to avoid the impact of high-cost local-market debt. Approximately 43% of CSN's debt is tied to the SELIC rate, which is currently at 14.25% and unlikely to decline in 2016. To offset some of this interest-rate exposure, CSN transferred USD1.2 billion in cash to Brazil to take advantage of higher interest income. However, the interest income generated will not significantly reduce its debt service burden.
Previous Steps Taken
CSN renegotiated its bank debt of BRL4.8 billion maturing in 2016 - 2017 to maturities beyond 2018. The renegotiated debt maturities are significant as CSN seeks to preserve its large cash balance. CSN was also able to conclude its Congonhas joint venture (JV) with an Asian consortium, resulting in CSN having an 87.52% stake in the JV and full access to BRL3.5 billion of cash at the Namisa iron ore mine.
--2% increase in steel volumes sold during 2015; -6% in 2016.
--10% decline in iron ore volumes sold during 2015 and 27% increase in 2016.
--20% EBITDA margin in 2016.
--EBITDA of BRL2.9billion in 2016 and BRL3.7billion in 2017.
--$45 iron ore in 2016 and 2017 with a $50 long-term price estimate.
--BRL2.5 billion of asset sales in 2016 and BRL500 million in 2017 and 2018.
--No dividends paid in 2016 and 2017.
Fitch could downgrade CSN's ratings if its credit metrics and cash flow generation further deteriorate and the company is unable to maintain its liquidity position during 2016.
A ratings upgrade is unlikely in 2016. A change in the Rating Outlook to Stable could occur if CSN is successful in all of its asset sales, reduces its high level of cash flow burn, and preserves its liquidity during the year.
CSN has historically maintained a robust cash position. As of Sept. 30, 2015, CSN had BRL8.2 billion of cash and marketable securities and BRL34.3 billion of total debt. CSN's debt primarily consists of senior notes, perpetual bonds, bank loans, and prepayment financings. The company was successful in extending BRL4.8 billion of debt previously due in 2016 and 2017 to between 2018 and 2022.
CSN transferred approximately USD1.2 billion of cash from the U.S. to Brazil during 3Q15 to take advantage of high domestic interest rates. The additional passive interest income generated will provide some relief to CSN's SELIC rate based debt.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
--CSN Long-term Foreign and Local currency IDRs to 'B-' from 'B+';
--CSN Long-Term rating to 'BBB-(bra)' from 'A-(bra)';
--CSN Islands XI senior unsecured Long-Term rating guaranteed by CSN to 'B-/RR4' from 'B+/RR4';
--CSN Islands XII senior unsecured Long-Term rating guaranteed by CSN to 'B-/RR4' from 'B+/RR4';
--CSN Resources S.A. Senior unsecured USD Note Long-Term rating guaranteed by CSN to 'B-/RR4' from 'B+/RR4'.
The Rating Outlook remains Negative.
For additional details on CSN please see attached special report: CSN Scenario Analysis - The Next Giant to Fall?
Date of Relevant Rating Committee: Feb. 1, 2016
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form