Gerdau Ameristeel US Inc. -- Moody's upgrades Gerdau's ratings to Baa3; stable outlook

Rating Action: Moody's upgrades Gerdau's ratings to Baa3; stable outlookGlobal Credit Research - 19 Mar 2021New York, March 19, 2021 -- Moody's Investors Service, ("Moody's") has today upgraded the ratings of the debt issues of Gerdau Trade Inc. (guaranteed by Gerdau S.A. and its operating subsidiaries in Brazil) and of GTL Trade Finance Inc. (guaranteed by Gerdau S.A. and its operating subsidiaries in Brazil), as well as the solid waste disposal bonds issued by St. Paul Port Authority, MN (guaranteed by Gerdau S.A.) to Baa3 from Ba1. At the same time, Moody's has assigned a Baa3 issuer rating to Gerdau S.A. ("Gerdau") and withdrawn the company's corporate family rating. The outlook is stable. Ratings upgraded: ..Issuer: Gerdau Trade Inc. USD 750 million senior unsecured notes due 2023: to Baa3 from Ba1..Issuer: GTL Trade Finance Inc.USD 1,250 million senior unsecured notes due 2024: to Baa3 from Ba1USD 500 million senior unsecured notes due 2044: to Baa3 from Ba1..Issuer: St. Paul Port Authority, MN USD 51 million solid waste disposal revenue bonds due 2037: to Baa3 from Ba1 Ratings assigned: Issuer: Gerdau S.A. Issuer rating: Baa3 Ratings withdrawn: Issuer: Gerdau S.A. Corporate Family Rating: withdrawn, previously rated Ba1The outlook for all ratings is stableRATINGS RATIONALE:The upgrade of Gerdau's ratings to Baa3 from Ba1 reflects the company's history of conservative capital allocation, which combined with Moody's expectations of strong operating performance throughout 2021, will contribute to further deleveraging and balance sheet strengthening. Gerdau has paid down $3.7 billion in total debt since 2014 and streamlined operations through asset sales and optimization of its operating capacity. The company has also maintained a disciplined approach to liquidity, investments and dividend distributions. The company's strategy and execution contributed to sequential reductions in financial leverage and improvements in credit metrics increasing its cushion to withstand future volatility in operations. Gerdau's adjusted leverage declined to 2.6x at the end of 2020 from the 6.2x peak in 2015 and will decline further to 2x in 2021 on the back of current positive industry dynamics in Brazil and in the US. Overtime, Moody's expects Gerdau to maintain a robust liquidity profile, adjusted leverage within the 2-3x range and reported net leverage within its target of 1.0-1.5x.Gerdau's Baa3 ratings are supported by the company's historically solid cash generation, which reflects its strong market position in the several markets where it operates, good operational and geographic diversity, cost-driven management, flexible mini-mill cost structure, as well as conservative financial policies. Despite volatile operating environments, Gerdau has generated positive free cash flows since 2013, and was able to significantly reduce debt levels, partially with the proceeds from asset divestitures. Constraining the ratings are the company's exposure to the cyclicality of the steel industry, especially in Brazil and the US, and to exchange rate volatility considering that more than half of its cash flows are generated in Brazil and in other Latin American countries. The potential liquidity call coming from a negative ruling under Brazil's Administrative Council of Tax Appeals (CARF) is an additional credit concern, although Moody's recognizes that visibility over this potential overhang is low at this point.Gerdau's operating performance in 2021 will remain strong, with operations in Brazil and the US benefiting from solid fundamentals mainly for residential construction and healthy metal spreads. The special steel segment will benefit form a pickup in automotive production after the 2020 slump. Steel prices will likely soften from current high levels during the second half of 2021, but Gerdau will continue to benefit from rising sales volumes in its main markets and a depreciated local currency in Brazil to preserve operating margins and prices in local currency. The company's Moody's-adjusted consolidated EBITDA margin increased to 19% in 2020 from a low of 9.9% in 2017 and will remain within 14%-16% in the future even considering volatility in its key end markets. The company's profitability level reflects its streamlined operations after several asset sales and focus on higher value-added products and markets, as well as its significant operating leverage coming from the mini-mill production profile, which is responsible for about 75% of its total crude steel capacity.LIQUIDITYGerdau has a strong liquidity position, which provides it with flexibility to withstand short term shocks. Gerdau had a BRL7.7 billion cash position at the end of 2020, plus a BRL4.2 billion ($800 million) revolver facility due in October 2024 (of which BRL4 billion was available) and only BRL2.7 billion in debt coming due until the end of 2022. In January 2021, Gerdau paid down BRL1.2 billion ($230 million) in outstanding notes, which reduced its cash position but also eliminated virtually all material debt maturities until the last quarter of 2022. The company has flexibility to reduce capex and dividend payments to the minimum required by law to adjust its cash outflows in times of lower demand. Historically, Gerdau has generated positive free cash flow even during downturns thanks to its financial discipline and working capital management, and pursued liability management initiatives that reduced debt cost and increased the average maturity of debt.ESG CONSIDERATIONSMoody's views the global steel sector as having high environmental risk, particularly with respect to carbon transition risk and waste and pollution. Steel companies that operate blast furnaces are more exposed to carbon transition risk than electric arc furnace (EAF) producers, although the latter have high electricity requirements. The industry's transition to EAF will be slow and require new capital investment, as well as sufficiency of scrap supply. In this sense, Gerdau's predominantly mini-mill operating structure and scrap-recycling facilities give it an edge relative to producers focused on blast furnaces. Gerdau owns 254,000 hectares of forest, of which 91,000 are areas for biodiversity conservation, within the Cerrado and Atlantic Rainforest biomes. The company is the world's largest producer of charcoal and uses it as a bio-reducing agent in the production of pig iron and steel in part of its integrated mills. Gerdau operates two iron ore mines and has one active upstream tailings dam in Ouro Preto, but expects to complete the deposition of dry tailings and the process of de-characterization by 2021.RATING OUTLOOKThe stable outlook reflects our expectation that the company will prudently manage its liquidity and expenses overtime to preserve its metrics and credit quality amid volatility in its key end-markets.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSNegative pressure on the rating or outlook could result from a severe deterioration in market conditions that lead to weaker liquidity or persistently high leverage, with total debt to EBITDA above 3x on a sustainable basis (2.6x in 2020), and interest coverage (EBIT to interest expense) below 4x (5.4x in 2020). A deterioration in volumes and margins in Gerdau's main markets (namely Brazil and the US), affecting its ability to generate positive free cash flow or limited flexibility for capex and dividend reduction could trigger a downgrade. A sharp deterioration in the controlling shareholders' (Metalúrgica Gerdau) financial position or a downgrade of Brazil's (Ba2 stable) sovereign rating could also lead to a downgrade of Gerdau's ratings.An upgrade of the ratings could occur if Gerdau is able to sustain profitability, as measured by EBIT margin, at high single digit (13.3% in 2020), while improving liquidity and leverage further, with total adjusted debt to EBITDA of around 2x and EBIT to interest expense above 5.5x on a sustained basis. The maintenance of conservative financial policies would also be required for a rating upgrade. Finally, an upgrade of Gerdau's ratings would require an upgrade of Brazil's sovereign ratings and long-term visibility of Brazil's economic strength, or reduced exposure to the country's domestic fundamentals.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.Based in Brazil, Gerdau S.A. (Gerdau) is the leading producer of long steel in the Americas and one of the largest suppliers of special long steel in the world, with total capacity of over 20 million tons per year of crude steel and 16.7 million tons per year of rolled products. Its US subsidiary, Gerdau Ameristeel Corporation (Gerdau Ameristeel), is the second-largest long steel producer in North America. In 2020, Gerdau reported consolidated annual revenue of BRL43.8 billion ($8.6 billion converted by the average exchange rate). The group has operations in 10 countries, with relevant market shares in Brazil, the US, Canada, Peru, Uruguay, Argentina, Mexico and Venezuela, along with joint ventures in Colombia, Mexico and the Dominican Republic.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Carolina Chimenti Asst Vice President - Analyst Corporate Finance Group Moody's America Latina Ltda. Avenida Nacoes Unidas, 12.551 16th Floor, Room 1601 Sao Paulo, SP 04578-903 Brazil JOURNALISTS: 0 800 891 2518 Client Service: 1 212 553 1653 Marianna Waltz, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 0 800 891 2518 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​