Fitch Affirms CSN at 'B-'; Outlook Remains Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Companhia Siderurgica Nacional's (CSN) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B-'. Fitch has also affirmed CSN's National Scale rating at 'BB-(bra)'. The Rating Outlook remains Negative. A full list of rating actions follows at the end of this release.

The 'B-' rating reflects CSN's extremely leveraged capital structure and its limited ability to generate substantial cash flow from its steel business in Brazil. The recovery in iron ore prices and an improved outlook for iron ore from earlier in 2016 have bolstered cash flow generation from its iron ore business, and should place the company in a better position to negotiate asset sales during the next 12 months.

The Negative Outlook continues to reflect high refinancing risk between 2018 and 2020. Fitch's base case assumes that CSN will be able to complete a refinancing of at least BRL5 billion of debt due in 2018 with local banks during the first half of 2017. Failure to progress within this timeframe would result in a downgrade to 'CCC'.

KEY RATING DRIVERS

Severe Deterioration in Local Steel Industry; Limited Improvement in 2017

Brazilian steel demand is expected to decline 16% during 2016, reaching 17.9 million tons, after dropping 17% in 2015. Current levels are similar to industry performance of 2009. Given the still poor perspectives for improvement in Brazil's GDP during 2017, local steel demand is expected to recover a modest 3.5%, according to Instituto Aco Brasil. Fitch projects that CSN's local sales volumes will drop by 10% in 2016, after falling by 20% in 2015, and then expand by 5% during 2017, reflecting the restart of its second blast furnace in third quarter 2016 (3Q16).

A bright spot for the local industry is that steel producers have been able to apply consecutive price increases since the end of 2Q16 due to a drop in inventory levels, which have supported improved operating results during 3Q16. In the case of CSN, the company announced 10% price increases in May, June, and July and recently pushed prices up by an additional 5%. Fitch expects price increases of between 8% to 10% during 2017, excluding a more meaningful double-digit increase to automakers.

Challenge to Sustain Rebound in CFFO; Iron Ore Price Dynamics is Key

The deterioration of CSN's operating cash flow largely reflects the combination of sharp declines in steel volumes, low iron ore prices, and high interest expenses. Short-term recovery relies on the ability to continue to pass along price increases in the domestic steel segment, manageable coal costs, and on sustained iron ore prices above USD60 per ton.

Fitch's base case scenario projects CSN's adjusted EBITDA at approximately BRL3.7 billion for 2016 and BRL3.2 billion in 2017, considering Fitch's iron ore price deck of USD45. CSN's operating performance and cash flow generation are largely sensitive to iron ore price. If iron ore prices, which are currently at over USD80, remain robust and average USD60 throughout next year, the company's 2017 EBITDA would be BRL4.8 billion.

During the LTM ended Sept. 30, 2016, CSN generated BRL3.3 billion of adjusted EBITDA, and CFFO of BRL725 million. These results compare with BRL2.9 billion and BRL2.1 billion, respectively, in 2015, which benefited from an extraordinary non-recurring dividend of BRL595 million received from the corporate reorganization of Congonhas Minerios.

Considering the current capital structure and the annual BRL2.9 billion interest burden CSN faces, Fitch estimates CSN's FCF to remain negative at around BRL1 billion during 2017, considering Fitch's iron ore price deck of USD45 per ton. At USD60 per ton, FCF would be positive by BRL460 million.

Fitch's base case scenario considers capex of BRL1.1 billion, which represents a steady decline from BRL1.6 billion in 2016 and 2015. During 2016, CSN efficiently managed working capital, leading to an inflow that resulted in positive operating cash flow. Going forward, working capital requirements will be neutral to negative, as inventories are already at low levels, and accounts receivable might be pressured in order to support continued sales expansion.

Unsustainable Capital Structure; Asset Sale Remains Paramount to Avoid Debt Restructuring

Fitch's base case scenario estimates CSN's net leverage to be around 6.9x during 2016. Absent an asset sale this ratio will increase to 8.4x at Fitch's iron ore price deck of USD45 per ton. Considering the range of iron ore prices of USD50 to USD60 per ton, net leverage could decline to the range of 5.2x to 7.0x during 2017. Per Fitch's criteria, CSN's net leverage was 7.7x as of the LTM period ended Sept. 30 2016, an improvement from 8.7x at the end of 2015, mostly reflecting the impact of appreciation of the BRL on the company's total debt.

Fitch believes the most likely asset disposal to be completed by CSN will be the sale of a minority stake in Congonhas Minerios that could represent an inflow of around BRL8 billion. On a pro forma basis, net leverage ratios during 2017 would decline to 5.7x at Fitch's iron ore price deck of USD45 per ton. Given the range of USD50-USD60 per ton for iron ore prices in 2017, net leverage would be in the range of 3.4x to 4.7x.

Elevated Refinancing Risks

CSN faces an unsustainable debt amortization profile. As of Sept. 30, 2016, CSN reported cash and cash equivalents of BRL5.4 billion compared to total debt of BRL30.3 billion. The company faces debt amortization of BRL2.3 billion in 2016/17, BRL5.6 billion in 2018, BRL14.4 billion between 2019 and 2020 (BRL6.4 billion of cross-border issuances) and BRL8.1 billion after 2021. Fitch's base case scenario assumes that the CSN will be able to roll over at least BRL5 billion of local bank debt during the first half of 2017.

Fitch considers the asset sale to be paramount to avoid a debt restructuring. Successful asset sales of around BRL8 billion would lead to an improvement in leverage ratios during 2018, potentially allowing CSN to refinance its bonds issuances due 2019 and 2020.

KEY ASSUMPTIONS

--1% decrease in steel volumes sold during 2016; expansion of 5% in 2017

--18% increase in iron ore volumes sold during 2016 and 3% increase in 2017

--Average iron ore price of USD56 per ton during 2016 and Fitch's price deck of USD45 per ton in 2017

--EBITDA of BRL3.7 billion in 2016 and BRL3.2 billion in 2017

--Successful refinancing of 2018's local banking debt

--No dividends paid in 2016 and 2017

RATING SENSITIVITIES

The inability to refinance the 2018 local banking debt during 1H17 would lead to a downgrade of CSN's ratings. Further deterioration of the steel industry in Brazil, or inability to proceed with price increases would also pressure free cash flow generation and liquidity, and consequently the ratings.

A revision in the Rating Outlook to Stable could occur if CSN is successful in its 2018 debt refinancing in conjunction with improving industry fundamentals, which would lead FCF stabilization. Rating upgrades would largely depend on the size of the asset sales and solid industry fundamentals.

LIQUIDITY

CSN has historically maintained a robust cash position. Nevertheless, its debt amortization schedule is unsustainable, as highlighted above. As of Sept. 30, 2016, CSN had BRL5.4 billion of cash and marketable securities and BRL30.3 billion of total debt. CSN's debt primarily consists of prepayment export financings (37%), local bank loans (24%), senior notes (18%) and perpetual bonds (11%).

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

-- Long-Term Foreign and Local Currency IDRs at 'B-';

-- National long-term rating at 'BB-(bra)' ;

-- CSN Islands XI senior unsecured long-term rating guaranteed by CSN at 'B-/RR4';

-- CSN Islands XII senior unsecured long-term rating guaranteed by CSN at 'B-/RR4';

-- CSN Resources S.A. senior unsecured USD note long-term rating guaranteed by CSN at 'B-/RR4'.

The Rating Outlook remains Negative.

Date of Relevant Rating Committee: Dec. 8, 2016.

Additional information is available at www.fitchratings.com

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

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