CSN Islands XII Corporation -- Moody's upgrades CSN's ratings to Ba3; stable outlook

Rating Action: Moody's upgrades CSN's ratings to Ba3; stable outlookGlobal Credit Research - 16 Apr 2021New York, April 16, 2021 -- Moody's Investors Service, ("Moody's") upgraded to Ba3 from B2 the ratings assigned to the senior unsecured notes of CSN Inova Ventures, CSN Islands XII Corporation and CSN Resources S.A. that are guaranteed by Companhia Siderurgica Nacional (CSN). At the same time, Moody's América Latina upgraded CSN's global scale ratings to Ba3 from B2 and the National Scale Ratings (NSR) to A1.br from Ba1.br. The outlook for the ratings is stable.Ratings upgraded:- Issuer : CSN Inova VenturesUSD 1.3 billion 6.75% BACKED Gtd Senior Unsecured Notes Due 2028: Upgrade to Ba3 from B2- Issuer: CSN Islands XII CorporationUSD 1 billion 7.0% BACKED Gtd Senior Unsecured Perpetual Notes: Upgrade to Ba3 from B2- Issuer: CSN Resources S.A.USD 600 million 7.625% BACKED Gtd Senior Unsecured Notes 2026: Upgrade to Ba3 from B2USD 925 million 7.625% BACKED Gtd Senior Unsecured Notes 2023: Upgrade to Ba3 from B2Outlook Actions:Issuers: CSN Inova Ventures, CSN Islands XII Corporation, & CSN Resources S.A.The outlook for the ratings is stable.RATINGS RATIONALEThe upgrade of CSN's ratings to Ba3 from B2 reflects the material improvement in the company's liquidity and debt profile following the completion of the IPO of its mining subsidiary, the reduction of about BRL4 billion in gross debt announced by the company since the beginning of 2021 and outlook for continued strong operations during 2021.On February 17, CSN raised BRL4.5 billion with the IPO of its mining subsidiary and will use the proceeds to reduce debt, increase its consolidated cash position and fund investments. The company is also working on the refinancing of BRL3.4 billion in debt with Banco do Brasil S.A. (Ba2/(P)Ba2 stable, ba2) and Caixa Economica Federal (Caixa) (Caixa, Ba2/(P)Ba2 stable, ba3) that come due in 2021-22. Finally, Moody's expects CSN to refinance its notes due in 2023. Pro forma to all transactions, CSN's cash position of BRL14.5 billion will cover debt maturities through 2025, and the company's debt amortization schedule will be comfortable, with only BRL3.5 billion in debt coming due in 2021-22 (compared to BRL9.2 billion prior to the transactions). Furthermore, CSN's total debt will likely decline further with the prepayments carried-out by the company and the excess cash generated during the year.CSN's Ba3/A1.br ratings reflect the company's position as a leading manufacturer of flat-rolled steel in Brazil (Ba2 stable), with a favorable product mix that is focused on value-added products, and as a major producer of iron ore (second-largest exporter in Brazil). Historically, the company has reported a strong Moody's-adjusted EBITDA margin of 20%-35% (33.5% in 2020), supported by its solid domestic market position, wide range of products across different segments and globally competitive production costs for both steel and iron ore. The ratings also incorporate the improvement in the company's leverage and liquidity after several measures taken over the past two years and the improved operating performance related to a favorable environment for both iron ore and steel.The ratings are constrained by CSN's recent track record of aggressive financial policies, including a highly leveraged capital structure, appetite for growth and dividend requirements to cover debt service at the parent level, although Moody's recognizes that the current actions taken by the company evidences a change in the management's approach to financial management. Additional credit concerns include the company's exposure to the volatility of the steel business in Brazil and to iron ore prices, its concentration in a single production site in the mining segment and potential overhangs related to judicial disputes regarding Transnordestina project, interruptions at Terminal de Carvão -- TECAR and to a recent arbitrage process.CSN's operating performance and credit metrics have improved materially since 2019, backed by the strong performance of the iron ore export business and a better than expected performance for steel in 2020. The company's iron ore operations will remain strong based on current high prices, relatively stable sales volumes and a favorable exchange rate for exports, while the steel business will benefit from better sales volumes in Brazil and improved profitability after investments made by CSN in a blast-furnace to improve efficiency. CSN's adjusted EBITDA increased to BRL10.1 billion in 2020 from BRL6.3 billion in 2019 and adjusted leverage declined to 3.6x from 4.8x. Moody's expects CSN's adjusted leverage ratios to decline to around 1-2x in the next 12-18 months and to remain within the 3.0 -- 4.5x range overtime based on a range of price scenarios for iron ore 62% Fe of $70-$100 per ton and normalized steel operations. Net leverage assuming a recurring BRL10 billion cash position will fall to below 1x in 2021 and would stand at 2-3x overtime. Leverage ratios could strengthen further depending on how much debt reduction the company pursues during 2021.The strong operating performance combined with cash preservation measures during the pandemic supported a material free cash flow generation of BRL7.5 billion in 2020, and led to an increase in the company's cash position to BRL10.4 billion at the end of 2020 (BRL13.7 billion including Usiminas' shares) from BRL1.6 billion at the end of 2019 (BRL3.7 billion with Usiminas' shares). Going forward, Moody's expects CSN to maintain a strong free cash flow generation with credit metrics and liquidity stronger than historical levels.RATING OUTLOOKThe stable outlook reflects Moody's expectation that the company's operations will continue to perform well in the next 12-18 months, and that CSN will continue to pursue stronger balance sheet and liquidity either through additional external events or using its own cash generation to reinforce its cash position or reduce debt.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if CSN proves to have a conservative financial management for an extended period time, or if the company is able to increase its financial flexibility further, either through a strengthened cash position or lower debt balance. An upgrade would also require total leverage (measured by total adjusted debt to EBITDA) below 3.5x (3.6x in 2020) and interest coverage ratios (measured by EBIT to Interest expenses) above 3x (2.6x in 2020) on a sustainable basis.The ratings could be downgraded if performance over the next 12 to 18 months deteriorates such that leverage remains above 4.5x and EBIT/interest below 2x on a sustained basis. Evidences of more aggressive financial policies or a deterioration in the company's liquidity profile would also trigger a downgrade or stabilization of the rating outlook.The principal methodology used in these ratings was Steel Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1074524. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.With an annual capacity of 5.9 million tons of crude steel, Companhia Siderurgica Nacional (CSN) is a vertically integrated, low cost producer of flat-rolled steel, including slabs, hot and cold rolled steel, and a wide range of value-added steel products, such as galvanized sheet and tinplate. In addition, the company has downstream operations to produce customized products, pre-painted steel and steel packaging. CSN sells its products to a broad array of industries, including the automotive, capital goods, packaging, construction and home appliance sectors. CSN owns and operates cold rolling and galvanizing facilities in Portugal, along with long steel assets in Germany through its subsidiary Stahlwerk Thüringen GmbH (SWT). The company also has a long steel line (500,000 tons capacity) in the Volta Redonda plant. CSN is a major producer of iron ore (the second-largest exporter in Brazil), with a sales volume of 31.2 million tons in 2020. The company has operations in other segments, such as cement, logistics, port terminals and power generation. CSN reported revenues of BRL30.1 billion ($5.8 billion) in 2020 with an adjusted EBITDA margin of 33.5%.Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. 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