CSN Resources SA has announced the reopening of its senior unsecured Euro notes due 2020. The reopening will carry the same rating as the original deal of BBB-.
CSN Resources SA is a Luxembourg incorporated subsidiary of Companhia Siderurgica Nacional and issuer of the existing USD 1 billion Euro notes, unconditionally and irrevocably guaranteed by CSN. Proceeds from the add on issuance of USD 500 million senior notes will be made available to CSN and its subsidiaries, to be used by CSN and its subsidiaries to repay short term indebtedness when due, extend the maturity profile of their debt, and for general corporate purposes.
Fitch currently rates CSN as follows:
Foreign currency Issuer Default Rating at BBB-
Local currency IDR at BBB-
National scale rating and local debenture issuances at AA+(bra)
CSN Islands Corp VIII-XII
Long term IDR at BBB-
Unsecured debt obligations at BBB-
CSN Resources SA
Long term IDR at BBB-
Unsecured Euro note debt obligations at BBB-
National Steel SA
USD 450 million 9.875% perpetual notes at BB
The Rating Outlook for CSN is Stable.
The investment grade BBB- rating on the notes reflects CSN's extremely strong liquidity and modest leverage. As of September 30th 2011, CSN held over BRL 15.6 billion in cash and marketable securities. The company's cash to short term debt ratio stood at 6.7 times and cash plus cash flow from operations to short term debt ratio was close to 8.0 times for the period. The company has a very manageable amortization profile, with the current cash balance alone sufficient to meet all debt repayments due until 2017. Fitch expects this balance to decline due to a combination of debt prepayment and bolt on acquisitions, but to remain high relative to short term debt.
The company's ratings are also supported by a solid track record of maintaining a strong capital structure, demonstrated by its five year average net debt to EBITDA ratio of 1.5 times. As of September 30th 2011, the company's net debt to latest 12 months EBITDA ratio stood at 1.8 times. The company's total debt to EBITDA ratio is relatively high at 4.2 times with total debt at BRL 27.7 billion. This large debt amount is due to large capital expenditures surrounding the ongoing expansion mainly for CSN's mining operations.
CSN generates consistently high EBITDA margins due to its vertical integration, substantial and growing iron ore operations, and high value added steel products. The company returned to EBITDA margins around 43% during the LTM September 30th 2011 after declining to 33% during 2009. During the third quarter of 2011, the company's standalone steel division and iron ore division EBITDA margins were 26% and 66%, respectively.
Fitch estimates revised CAPEX in 2011 in the region of BRL 4 billion mainly relating to the iron ore production expansion. CSN is expected to generate negative free cash flow of around BRL 1 billion, while maintaining a net debt to EBITDA ratio of around 2.1 times at year end 2011. FCF is expected to turn positive by 2014, with net debt to EBITDA falling below 2.0 times by 2013. Fitch expects FCF to remain positive for a sustained period following this heavy investment cycle.
During 2010, the company had a negative FCF of BRL 4.1 billion due to large CAPEX and investments of around BRL 5 billion and dividend payments of BRL 1.6 billion. The company's high profitability, large cash balance and low net debt for the rating category provide strong headroom for negative FCF generation through this investment cycle at the current rating level.
An upgrade could be considered following CSN's continued development of its iron ore assets that would result in the company joining the top five global exporters of seaborne iron ore. The company's mining division accounted for about 25% of revenues in 2010. As a leading Brazilian steel company with a growing presence in iron ore exports, along with a comfortable liquidity position and capital structure, CSN is also well positioned to take advantage of strategic opportunities should they arise. Rating concerns such as event risk and cyclicality of prices and demand are ever present for the steel and mining industries.
