CHICAGO--Fitch Ratings has upgraded Usinas Siderurgicas de Minas Gerais S.A.'s (Usiminas) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'CCC' from 'RD' and its National Scale rating to 'CCC(bra)' from 'RD(bra)'. At the same time, Fitch has upgraded Usiminas' senior unsecured notes to 'CCC/RR4' from 'C/RR4'.
The upgrades reflect the improvement in Usiminas' financial flexibility, following the completion of its debt restructuring and a capital injection. Due to the rescheduling of the maturity dates of 92% of the company's debt, it is now in a better position to withstand the severe downturn in Brazilian steel demand. The new ratings assume the company will comply with all requirements of the debt agreement and will have access to at least BRL700 million of the cash held at Mineracao Usiminas S.A. (Musa), a 70% joint-venture with Sumitomo, by June 2017. The ongoing shareholders disputes, however, continue to negatively overhang Usiminas' ratings.
KEY RATING DRIVERS
Improved Financial Flexibility
Usiminas has successfully completed its debt restructuring plan, which has resulted in a significant extension of the maturity date of 92% of the company's debt. As part of the agreement, this debt with the Brazilian creditors will be collateralized by assets consisting of its hot and cold coils units of the Ipatinga mill, representing 50% of the outstanding debt related to these Brazilian creditors. Usiminas' outstanding USD180 million unsecured notes due in 2018 were not part of the debt restructuring. The indenture for these notes includes a limitation on lien clause that typically requires the unsecured notes to be equally and ratably secured. If these notes due receive similar collateral or are not repaid, they would likely be downgraded in the future.
Challenging Dynamics in the Steel Industry
Usiminas' operating performance has been negatively impacted by the continued decline in demand for domestic steel in Brazil. Flat steel consumption in Brazil was down 18% during 2015 and 8% during the first nine months of 2016. Fitch expects limited recovery in sales volumes during 2017 and more solid recovery only during 2018. The challenging scenario of oversupply in the global steel market is expected to continue to pressure the industry's fundamentals during 2017.
Operating Cash Flow to Improve; FCF to Benefit from Lower Capex
Usiminas reported a material decline in operating performance during 2015 and 2016 as a result of severe deterioration in the Brazilian domestic steel market. Usiminas decided to resize its operation by reducing its capacity to be more in line with domestic demand, and mostly to avoid the need to operate in the non-profitable export market. The company halted certain production capacity at its Cubatao mill, maintaining only the rolling operations that could be supplied by third parties' input once product demand exists. Usiminas faced around BRL257 million of non-recurring expenses related to the capacity shutdowns, which also includes the renegotiations of its take or pay contract with MRS Logistica S.A.
Fitch's base case projects EBITDA generation of around BRL600 million in 2017, capex of BRL350 million, and positive FCF of approximately BRL50 million. These figures compare positively to EBITDA of BRL322 million, capex of BRL725 million and negative FCF of 539 million during 2015, per Fitch's criteria. Greater than expected efficiency in managing working capital flow during the second half of 2016 might further increase positive FCF, but Fitch considers Usiminas to now have limited ability as inventories are already at historically low levels.
Improvement in Debt Profile; Effective Deleveraging Trend Starting Mid-2017
Usiminas was able to extend the debt maturity of BRL6.7 billion of debt for 10 years, with a three-year grace period. The agreement was subject to a capital injection of BRL1 billion and the receipt of around BRL700 million of cash at Musa by June, 30 2017. Per Fitch's criteria, Usiminas' total debt was BRL7.1 billion as of June 30 2016. Fitch expects Usiminas' net leverage to be around 7.5x to 8.0x during 2016 and to decline to 4.5x-5.0x during 2017.
Ongoing Shareholders Disputes
The extended legal disputes between Usiminas shareholders elevate the company's business risks. The lack of agreement regarding business strategy and the recurring changes in management tends to slow down the decisionmaking process and provide little strategic clarity. Thus, considering the current tough environment in the steel industry in Brazil, it is a concern for Fitch regarding Usiminas' ratings.
--24% drop in steel volumes in 2016 and limited recovery from 2017 on with an increase of 5%;
--High single-digit increase in domestic prices in 2016;
--BRL350 million in capex in 2016;
--2016 EBITDA margin between 6%-7%.
Future developments that may individually or collectively lead to a positive rating action include:
--Sustained turnaround in Usiminas' operating cash flow generation that drives a deleveraging trend and benefit credit ratios;
--Faster than expected recovery of the local steel industry in Brazil;
--Positive resolution of shareholder disputes.
Future developments that may individually or collectively lead to a negative rating action include:
--Inability to access the cash at Musa
--Maintenance of net leverage ratio to levels above 6.5x during 2017
--Recurring shareholders disputes that delay the expected positive trend in cash flow
Usiminas' cash and marketable securities as of June 30, 2016 were BRL2.7 billion, but Fitch believes readily available cash at Usiminas' holding level to be only around BRL1.2 billion. This cash position plus the additional BRL700 million to come from Musa within the next three quarters should be sufficient to support operating cash volatilities in the medium term and face debt maturities starting during 2018. The uncertainties regarding the 2018 bond are partially mitigated by this liquidity.
FULL LIST OF RATING ACTIONS
Fitch has upgraded Usiminas' ratings as follows:
--Foreign Currency Long-Term IDR to 'CCC' from 'RD';
--Local Currency Long-Term IDR to 'CCC' from 'RD';
--National Scale rating to 'CCC(bra)' from 'RD(bra)';
--US$400 million notes due 2018 to 'CCC/RR4' from 'C/RR4'.
Additional information is available at www.fitchratings.com
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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