OREANDA-NEWS. Fitch Ratings has downgraded the foreign and local currency Issuer Default Ratings (IDRs) of Usinas Siderurgicas de Minas Gerais S.A. (Usiminas) to 'C' from 'B-' and the National rating to C(bra)' from 'BBB-(bra)'. In addition, Fitch has removed the IDRs from Rating Watch Negative. Fitch also downgraded Usiminas' senior unsecured notes to 'C/RR4' from 'B-/RR4'. See below for the full list of rating actions.

The downgrades reflect an expectation that Usiminas will likely enter into an agreement with its creditors that will allow for sufficient time to receive a capital injection, as per the company's Notice to the Market dated March 11, 2016. The high probability of Usiminas entering into a standstill agreement with its creditors is commensurate with a rating of 'C'.

However, Fitch views the BRL1 billion capital increase approved by Usiminas' board of directors to be insufficient for curtailing the company's level of cash flow burn in the long term. The company's capital structure is unsustainable, in our view, and would likely need additional resources to survive a prolonged period of stagnant demand. A debt restructuring would be unavoidable if Usiminas is unable to refinance its bank maturities and complete its capital injection in the near term.

KEY RATING DRIVERS

Unmanageable Liquidity Position: Usiminas' cash on hand as of Dec. 31, 2015 cannot cover maturities through 2016. Usiminas' plans for an equity injection and refinancing of its bank debt are absolutely necessary in order to manage its financial obligations. Usiminas breached its net debt / EBITDA covenant of 3.5x at year-end 2015 based on its bank debt, which the company was able to negotiate waivers on. Fitch does not believe Usiminas will be able to comply with this covenant requirement over the next two years, resulting in additional waivers required.

Unsustainable Leverage: Fitch projects Usiminas' net leverage will increase well above 14x during 2016 despite the company's plan to raise BRL1 billion of equity to offset its high level of cash flow burn. Weakening credit metrics will go unabated unless Usiminas receives additional equity and/or completes asset sales during 2016 and 2017. Fitch expects Usiminas to have difficulty raising cash through asset sales, as the company has very limited non-strategic assets it could dispose of, coupled with the inability to monetize any asset sales at maximum value given current market conditions. The company's current credit profile is untenable, as Fitch expects EBITDA generation to remain dismal in 2016 and 2017.

Cashflow to Remain Under Pressure: Fitch project Usiminas will generate negative free cash flow (FCF) during the next two years. Declining international steel prices, increased energy prices, high tax and interest rate burdens have all put downward pressure on the company's operating cash flow generation and will persist through 2016. The company's expectations of lower capex requirements and improved working capital management will likely not lead to any material changes in FCF generation over the short term.

Progressive Deterioration of Domestic and Worldwide Steel Markets: Flat steel consumption in Brazil was down 18% during 2015 with limited expectations for recovery over the near term. Brazil's industrial sector has unrelentingly decreased its demand for steel with continued weakening in the automotive, household appliances, and civil construction sectors. The global steel market was negatively impacted by Chinese steel producers who increased their exports by approximately 20% to 112 million tons and accounted for over one-third of global exports in 2015. Increased Chinese exports have put significant downward pressure on global steel prices and driven down global installed capacity utilization levels.

Brutal Operating Environment: Usiminas reported a 21% decline in domestic steel volumes sold as weaker demand levels were experienced across many of the company's end markets. Partially offsetting the decline in domestic demand was an increase in steel exports, particularly to the U.S. and Argentina. Steel volumes exported represented 27% of total volumes sold during 2015, an increase from 17% from the prior year. However, the offset in volumes sold in the domestic market compared to the export market will likely lead to further profitability deterioration due to lower pricing power and increased working capital needs for exports.

Unprofitable Iron Ore Business: Usiminas has no ability to generate cashflow from its iron ore business due to lack of port access. Usiminas cancelled its contract with the Sudeste Port during June 2015 after the port failed to open after more than three years of delays. Other major ports are owned by Vale and CSN which export their own iron ore.

KEY ASSUMPTIONS
Fitch's base case for the issuer includes the following assumptions:

--35% drop in steel volumes in 2016;
--5% increase in domestic prices;
--0% increase in export prices;
--2016 EBITDA margin between 3%-5%.

RATING SENSITIVITIES

Fitch would downgrade Usiminas' ratings to Restricted Default (RD) if the company is unable to meet its financial obligations following the standstill.

An upgrade of the ratings for Usiminas could occur following the completion of its standstill with creditors, successful refinancing of its bank debt to beyond 2018, and receipt of its expected equity injection.

LIQUIDITY

Usiminas' consolidated liquidity position has declined to BRL2 billion as of Dec. 31, 2015, compared to BRL2.9 billion as of Dec. 31, 2014, and Fitch expects further erosion. Usiminas reported BRL319 million of cash and cash equivalents at the holding company level as of Dec. 31, 2015, compared to BRL800 million as of Dec. 31, 2014. The company's cash-to-short-term debt ratio was 1.1x as of Dec. 31, 2015, compared to 1.7x as of Dec. 31, 2014. Usiminas will face refinancing issues for its amortization profile during 2016 and beyond if it does not lengthen its maturity schedule. The company's debt profile consists of BRL1.9 billion of maturities due in 2016 and BRL1.8 billion of maturities due in 2017.

FULL LIST OF RATING ACTIONS

Fitch has downgraded Usiminas' ratings as follows:

--Foreign currency Long-term IDR to 'C' from 'B-';
--Local currency Long-term IDR to 'C' from 'B-';
--National scale rating to 'C(bra)' from 'BBB-(bra)';
--US$400 million notes due 2018 to 'C/RR4' from 'B-/RR4'.

Fitch has removed the ratings from Rating Watch Negative.