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Usiminas, seesaw at CEO level

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For the third time in less than a year,  steelmaker Usiminas decided to change its chief executive officer. In a meeting on Thursday (March 23) the company’s board of directors  decided (7 votes to 4) to depose Rômel de Souza and elect Sergio Leite. It repeated the same change that had happened in May 25, 2016. After that, however, Mr. Souza was reinstated by a court injunction.

Some days ago (March 10) Moody’s Investors Service  upgraded to Caa1 from Caa2 the senior unsecured notes ratings of Usiminas Commercial Ltd. (guaranteed by Usinas Siderurgicas de Minas Gerais — “Usiminas”) and ‘affirmed the (P) Caa2 ratings of the backed senior unsecured global MTN programs of Usinas Siderurgicas de Minas Gerais S.A., Cosipa Commercial Ltd and Usiminas Commercial Ltd. The outlook for all ratings is stable’.

Rating rationale

According to Moody’s report:

“The upgrade to Caa1 reflects primarily the conclusion of important steps towards Usiminas’ full debt restructuring, including the BRL 1 billion capital increase concluded in July 2016, the renegotiation with banks and debentures holders completed in September 2016, and more recently, the BRL 1 billion capital reduction approved at Mineração Usiminas S.A. (MUSA, unrated). All those events contribute to reduce liquidity pressures in the short-term and will allow the company to focus more closely on its operations.

In September 2016, Usiminas negotiation with creditors representing 92% of its total debt has concluded with a payment extension of up to 10 years, with a 3-year grace period. Liquidity pressures were further relieved with the approval, on March 3rd, of the capital reduction at its 70% owned subsidiary MUSA, which will allow Usiminas to access BRL 700 million currently held by this subsidiary. The transaction is expected to be concluded within 60 days. Before the capital reduction approval, Usiminas had BRL 2.2 billion in consolidated cash at the end of 2016, but out of which only about BRL 539 million was available at the parent company. An additional step to complete the debt restructuring process will be the exchange offer for the USD 180 million outstanding senior unsecured notes, which needs to be completed by June 30, 2017. Failure to complete the exchange offer for at least 50% of the existing amount outstanding could trigger an event of default under the debt restructuring agreement.

A successful conclusion of the full debt restructuring program will enable Usiminas to improve its capital structure, further eliminating short-term liquidity pressures, while market fundamentals in Brazil’s steel industry start to gradually recover.

The ratings continue to reflect Usiminas’ solid position in the Brazilian flat-steel market, and the measures taken by Usiminas to adjust operations to the feeble demand in the domestic market. In May 2015, Usiminas announced the temporary halt of two blast furnaces in its Cubatão and Ipatinga mills, and in October 2015, the temporary interruption of activities of the primary areas of the Cubatão plant (including sinter and coke plants, blast furnaces and steelworks), concluded in January 2016. The downsizing process at the Cubatão steel mill has significantly reduced Usiminas’ cost structure and production capacity, providing flexibility to the company amid the deterioration of the steel market in Brazil. Despite the operational improvement observed during 2H16, credit metrics remain under pressure — we expect leverage (measured by total adjusted debt to EBITDA) to stay above 7x (10.1x in FY 2016) and interest coverage to remain negative in the next 12 to 18 months (-0.4x in FY 2016). “

 

Full Moody’s report