Fitch Upgrades Usiminas' IDRs to 'CCC'

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.

KEY ASSUMPTIONS

--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%.

RATING SENSITIVITIES

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

LIQUIDITY

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

Applicable Criteria

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

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013532

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013532

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

View source version on businesswire.com: http://www.businesswire.com/news/home/20161021005904/en/