OREANDA-NEWS. Fitch Ratings has downgraded the Long-term Foreign and Local currency Issuer Default Ratings (IDRs) for Companhia Siderurgica Nacional (CSN) to 'B+' from 'BB'. In conjunction with these downgrades, Fitch has assigned a recovery rating of 'RR4' to the securities that have been issued or guaranteed by CSN. Fitch has also downgraded the company's National scale rating to 'A-(bra)' from 'AA-(bra)'. A full list of rating actions follows at the end of this release.

A primary consideration in the downgrades is Fitch's more negative view of the long term price for iron ore. The drop in Fitch's long-term outlook for iron ore from \\$70 per ton to around \\$60 per ton decreases CSN's annual EBITDA by around BRL1.2 billion. At this pricing level, the company would struggle to generate free cash flow even if capex was kept to maintenance levels.

Fitch has used \\$50 per ton of iron ore in 2016 and \\$55 per ton in 2017 in its projections for CSN. At this level, Fitch projects continued negative free cash flow generation for CSN. As a result, asset sales will be required in order to stabilize the company's leverage metrics. While Fitch believes non-core assets identified for sale have meaningful value, monetizing these assets for maximum value will be challenging in the current environment. Potential divestments by CSN include its: 1) Tecon container terminal; 2) hydroelectric generation assets; 3) holdings of 14.13% of the common shares and 20.68% of the preferred shares of Usiminas, and 4) non-voting shares in MRS Logistica.

CSN's Rating Outlook remains Negative. Fitch anticipates revising the Rating Outlook to Stable after the company finalizes the Congonhas joint venture. CSN is anticipated to have an 88% stake in this joint venture while an Asian consortium consisting of Itochu Corporation, JFE Steel Corporation, Kobe Steel, Ltd, Nisshin Steel Co. Ltd., Posco, and China Steel Corporation would own the balance. CSN would contribute its Casa de Pedra iron ore mine, 9% of its stake in MRS Logistica, as well as its 60% stake in the Namisa iron ore joint venture. The Asian consortium would contribute its 40% stake in Namisa.

KEY RATING DRIVERS

Cash Flow Pressure

Cash flow pressure is not expected to abate during 2016. Fitch projects the company's free cash flow will be negative by BRL1.0 billion. This compares with CSN's negative free cash flow projection of around BRL3.0 billion during 2015. The improvement for 2016 relative to 1H2015 despite lower iron ore prices is due to reduced working capital needs and higher interest income, as a result of the company moving a significant portion of its cash and marketable securities from the United States to Brazil.

Fitch projects CSN's net leverage will increase to around 6.7x in 2015 from 4.7x in 2014. Fitch's net leverage calculation excludes CSN's proportional cash (BRL3.5 billion) held in Namisa during 2014 and 2015 and also removes several non-cash EBITDA adjustments that are included by the company in its calculations. Fitch's base case for 2016 assumes the Congonhas JV is completed and that the cash currently held in Namisa is available to CSN. As a result, net leverage remains flat at 6.7x despite negative FCF.

Headwinds Unlikely to Diminish in 2016

Headwinds faced by the company during the first six months of 2015 included the sharp drop in iron ore prices, a collapse in Brazilian steel demand, and rising benchmark interest rates. The first two variables are not projected to improve materially in 2016, while the interest rate pressure could diminish slightly.

Fitch calculates the drop in the average iron ore prices to USD60 per ton during 1H15 from USD111 in 1H14 to have lowered the company's EBITDA by approximately BRL1.9 billion during this comparable time period. CSN's working capital needs increased by around BRL1.9 billion in the first semester of 2015, as the company expanded its export sales of steel. An additional challenge faced by the company was an increase in the benchmark SELIC rate to 14.25% from 10.75% during 1H14. With BRL15 billion of local currency debt, CSN's interest expenses were estimated to have climbed by BRL300 million during the first half of the year. For 2016, baseline expectations are that the SELIC will fall to 12.0%.

Solid Business Profile Despite Weak Capital Structure

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.

KEY ASSUMPTIONS

--1.9% increase in steel volumes sold;
--18% decline in iron ore volumes sold;
--22% EBITDA margin in 2015;
--EBITDA of BRL3.4 billion in 2015;
--\\$50 iron ore in 2016 and \\$55 in 2017 with a \\$60 long-term price estimate;
--BRL2.2 billion of asset sales in 2016;
--No dividends paid in 2016 and 2017.

RATING SENSITIVITIES

CSN's ratings could be downgraded for one or more of the following reasons:

--CSN's Japanese partners in the Namisa joint venture exercise their USD3.5 billion put option

--Iron ore prices average below \\$50 for more than 12 months
Failure to sell more than BRL4 billion of assets during the next two years

CSN's Rating Outlook will likely be revised to Stable when it concludes the Congonhas joint venture.

A rating upgrade to 'BB-' or higher is contingent upon one or more of the following factors:

--An improvement in Fitch's long-term outlook for iron ore
--Asset sales in excess of BRL4 billion
--A material decline in Brazilian interest rates

LIQUIDITY

CSN had BRL7.8 billion of cash and marketable securities as of June 30, 2015. This compares with BRL30.5 billion of debt. The company faced debt amortization of BRL2.9 billion in 2016 and BRL4.5 billion in 2017 as of June 30, 2015. Most of this debt is with Brazilian banks. During September, CSN announced that it had refinanced BRL1.3 billion of debt falling due in both 2016 and 2017 with Caixa. This debt now amortizes between 2018 and 2022. Fitch believes that CSN will be successful in extending the terms of its other Brazilian bank debt before the end of 2015.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings:

--Long-term Foreign and Local currency IDRs to 'B+' from 'BB';
--CSN National Long-Term rating to 'A-(bra)' from 'AA-(bra)';
--CSN Islands XI senior unsecured Long-Term rating guaranteed by CSN to 'B+' from 'BB and assigned a recovery rating of RR4';
--CSN Islands XII senior unsecured Long-Term rating guaranteed by CSN to 'B+' from 'BB' and assigned a recovery rating of RR4;
--CSN Resources S.A. Senior unsecured USD Note Long-Term rating guaranteed by CSN to 'B+' from 'BB' and assigned a recovery rating of RR4.

The Rating Outlook remains Negative.