OREANDA-NEWS. Fitch Ratings has downgraded the Long-term Foreign and Local currency Issuer Default Ratings (IDRs) of Companhia Siderurgica Nacional (CSN) to 'BB' from 'BB+' and National scale rating to 'AA-(bra)' from 'AA(bra)'. The Rating Outlook remains Negative. A full list of rating actions follows at the end of this release. 

The downgrade reflects deterioration in the company's capital structure due to high capex, weak demand for steel in Brazil, and a sharp decline in iron ore prices. The negative rating action further reflects Fitch's more negative view of long-term iron ore prices, which will continue to affect the company's capital structure in the future.

KEY RATING DRIVERS

Deteriorating Credit Metrics Straining Capital Structure

CSN's leverage metrics have been negatively impacted over the last 12 months by weak domestic steel demand, low iron ore prices, continued capital investments, and sustained negative free cash flow (FCF) generation. Based on Fitch's methodology, CSN's net leverage increased to 5.8x for LTM March 31, 2015 from 4.7x in 2014, and 3.4x in 2013. Fitch's net leverage calculation excludes CSN's proportional cash held in Namisa and also removes several non-cash EBITDA adjustments that are included by the company in its calculations. Absent the completion of the merger between Casa de Pedra and Namisa or significant asset sales, Fitch projects CSN would be unable to deleverage from its current financial position over the next four years.

Persistent Negative FCF

Fitch has revised its long-term price for iron ore down to \$70 per ton from \$90 per ton, which will continue to hurt CSN's operating cash flows. The company has generated negative FCF over the last five years due to heavy capital investments and high dividend payments. While capital expenditures and dividends declined during 2014, FCF remained negative at BRL1.2 billion due to lower profitability. To stabilize its capital structure, which could lead to a revision of CSN's Rating Outlook to Stable, the company will need to reduce capital expenditures and dividends.

Potential Asset Sales

CSN has the potential to sell off several of its non-core assets in order to improve its capital structure over the next six to 18 months. Key assets include CSN's holdings of 14.13% of the common shares and 20.69% of the preferred shares in Usiminas. The company could also sell its container port terminal and reduce its shares in the railroad, MRS Logistica, that are not restricted by the existing shareholder agreement. Net leverage could decline by 0.2x-1.0x in 2015 depending on which, and if, CSN goes through with the sale of any of these non-core assets.

Solid Business Positions

CSN is one of two of the largest flat steel producers in Brazil, with a strong domestic position. Its market share in products such as tinplate and galvanized steel in Brazil were 88% and 39% during 2013. CSN's solid Brazilian market position resulted in a 25% EBITDA margin from its steel division, which compares favorably amongst its global peers. CSN's Brazilian steel industry position is complemented by its seaborne iron business. CSN exported 28.9 million tons of iron ore (including 60% of Namisa's output) during 2014, nearly 89% of which went to Asia.

Strong Liquidity

CSN has maintained a strong liquidity base despite the difficult environment it has faced over the last 12 months, with over BRL9 billion of cash and marketable securities as of March 31, 2015. CSN had a cash-to-short-term debt ratio of 5.2x as of March 31, 2015 which has remained above 3.0x the last four years. Cash on the balance sheet is enough to cover debt repayments until 2018. Furthermore, Fitch expects CSN to maintain strong access to financing in the local markets should the company seek additional funding.

Weak Domestic Steel Demand

Fitch expects CSN's profitability will be challenged over the next two years, as lower domestic steel demand will only be partially offset by sales by its international subsidiaries. CSN's steel volumes increased 12% during first quarter 2015 (1Q15) from 4Q14 primarily due to higher volumes sold by its overseas subsidiaries. Brazilian steel producers are expected to continue to benefit from 12% steel import tariffs; however, reduced demand within the automobile, home appliance, and construction sectors will persist in the domestic market.

KEY ASSUMPTIONS
--11% decline in steel volumes sold;
--24% decline in iron ore volumes sold;
--23% EBITDA margin in 2015;
--EBITDA of BRL3.5 billion in 2015.

RATING SENSITIVITIES
Fitch could downgrade CSN's ratings if its credit metrics and cash flow generation further deteriorate and the company continues to develop its projects at a pace that results in its net adjusted debt/EBITDA ratio remain above 4.0x. A downgrade could also follow deterioration in the company's comfortable liquidity position and/or a further deterioration in the Brazilian operating environment.

A ratings upgrade is unlikely in 2015 or 2016. A revision in the Rating Outlook to Stable could occur if the company successfully completes the merger of its Namisa, Casa de Pedra, and port and railway facilities into one new entity.

LIQUIDITY AND DEBT STRUCTURE

CSN's strong liquidity profile is driven by its large cash position of over BRL9 as of March 31, 2015. During the same period, the company's total debt was BRL31.1 billion, which was comprised mainly of senior notes, perpetual bonds and bank loans. Fitch believes CSN's announcement of a new strategic alliance with its partners in Namisa for a merger of CSN's mining assets, including Namisa and Casa de Pedra, would be a credit positive event. Namisa is owned 60% by CSN and 40% by an Asian consortium including Itochu Corporation, JFE Steel Corporation, Kobe Steel, Ltd, Nisshin Steel Co. Ltd., Posco, and China Steel Corporation. The outcome of the merger would dilute the Asian consortium's standalone stake in Namisa for a smaller stake of the combined entity, which will be named Congonhas Minerios S.A. After the transaction, CSN would hold 88.25% and the Asian consortium would hold 11.75% of Congonhas Minerios' capital on a debt-free and cash basis, respectively. The closing date is scheduled for the end of 2015. As of Dec. 31, 2014, Namisa standalone had cash and cash equivalents of BRL5.4 billion and loans and financing of BRL398 million, most of which was through related parties.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings:

--Long-term Foreign and Local currency IDRs to 'BB' from 'BB+';
--CSN National Long-Term rating to 'AA-(bra)' from 'AA(bra)';
-- CSN Islands XI senior unsecured Long-Term rating guaranteed by CSN to'BB' from 'BB+';
--CSN Islands XII senior unsecured Long-Term rating guaranteed by CSN to 'BB' from 'BB+';
--CSN Resources S.A. Senior unsecured USD Note Long-Term rating guaranteed by CSN to 'BB' from 'BB+'.

The Rating Outlook remains Negative.