Overview -- Despite a weak scenario for the global steel industry, Gerdau S.A. has maintained adequate cash flow generation. -- We are affirming our 'BBB-' global scale and 'brAAA' national scale ratings on Gerdau. -- The stable outlook reflects our expectation that Gerdau will manage to improve its credit metrics--even under a scenario of weak prices and lower margins. Rating Action On Oct. 18, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' global scale and 'brAAA' national scale ratings on Brazil-based steel maker Gerdau S.A.. The outlook remains stable. Rationale The ratings on Gerdau reflect our assessment of the company's "satisfactory" business risk profile and "intermediate" financial risk profile. The supporting factors are Gerdau's adequate geographic diversification throughout the Americas, the company's still-favorable cost position in Brazil, its efficient operations overall, and its "strong" liquidity. Offsetting these rating strengths are Gerdau's exposure to the cyclical, commodity-oriented, long-steel industry; the fierce competition from imports; and the potentially challenging market conditions in the next 12 months to 18 months. Gerdau holds a strong market position in Brazil and benefits from geographic and product diversification in the steel industry in the Americas. The company has expanded in specialty steel markets globally. This segment accounted for about 25% of Gerdau's consolidated EBITDA in the last 12 months. Profitability declined to 12% in the 12 months ended June 2012 from 16% in 2010, reflecting weak global steel prices and global overcapacity, significant competition from imported steel in Brazil and elsewhere in Latin America, and cost pressures on raw material. In addition, the dynamics of the scrap market has changed in Brazil in recent years and has become more volatile. However, Gerdau has made significant efforts to improve its overall cost competitiveness and working capital management, and some of the company's new operations in Brazil should help improve cash flows in 2013 as they ramp up production. The recent decline in raw material prices (especially iron ore and metallurgical coal for the company's Ouro Branco mill and scrap for its mini-mills in Brazil and in the U.S.), as well as cheaper energy costs (gas in the U.S. and lower taxes on energy purchases in Brazil) should help offset the competitive pressures and result in some margin improvement through 2013. Still, we believe that import competition in Brazil will likely remain a continuous threat to Gerdau, either active or latent, keeping margins down through the period even under a relatively weaker currency. In North America, demand is improving with positive growth in the nonresidential segments, but it remains volatile because of uncertain market conditions. Gerdau's operating performance should remain weak in 2012, with a consolidated EBITDA margin of about 12%--in line with what we had observed in the first six months of 2012. On the positive side, the depreciation of the Brazilian real (R$) has benefited Gerdau by marginally reducing the competitiveness of imported steel and increasing the income from the conversion of foreign exchange to Brazilian reais from Gerdau's U.S. operations. In 2013, we expect small improvements in profitability from marginal lower input costs and a slow recovery in demand. As of June 2012, Gerdau's credit metrics remained in line with our expectation, with gross debt to EBITDA and funds from operations (FFO) to gross debt of 3.6x and 27%, respectively, which are equivalent to 2.7x and 35% of adjusted net debt. We believe total debt to EBITDA will remain at about 3.0x in 2012 and then gradually improve towards 2.5x in 2013. And despite Gerdau's high capital expenditure program, we believe that the company will start generating positive free operating cash flow in 2013, which should support the company's leverage reduction going forward. Liquidity We assess Gerdau's liquidity as strong under our criteria. The company's cash position totaled R$3.2 billion as of June 31, 2012, compared with short-term debt maturities of R$1.9 billion and a smooth amortization schedule in the following years. Our liquidity assessment reflects the following assumptions: -- Gerdau will sustain cash sources above cash uses by a ratio higher than 1.8x through 2013; -- Cash sources will remain in excess of cash uses even if EBITDA declines by more than 30%; and -- The EBITDA headroom is about 30% for the company's most stringent covenants, all else being equal. Our calculation of Gerdau's cash sources include cash reserves and FFO of R$3.0 billion to R$3.5 billion. We also include Gerdau's global revolving credit facility of R$2 billion and preapproved loans from the Brazilian National Development Bank of R$1 billion. Cash uses include average capital expenditures of R$2.9 billion in 2012 and R$2 billion in 2013, debt amortization of about R$1.9 billion in 2013, and cash dividends as a payout of 30% of net profits. We believe that Gerdau will generate free operating cash flow in 2013, even assuming the execution of its high investment plan. (The increase in investments will occur as Gerdau implements its R$10 billion five-year plan for 2012-2016, primarily in projects that enhance the value of its existing assets or in marginal capacity expansions.) We did not factor in large acquisitions in our ratings analysis. Furthermore, we expect that management will remain focused on preserving liquidity. Outlook The stable outlook reflects our opinion that Gerdau will sustain its debt reduction trend during the next two to three years--even if margins remain depressed during the next 12 months to 18 months. We could lower the ratings if, as a result of a deterioration in Gerdau's markets or aggressive growth plans, total gross debt to EBITDA increases to more than 4x and the company's cash position weakens, resulting in an adjusted net debt to EBITDA consistently above 3x. We could raise the ratings if the company successful implements its investment program, and if it reports stronger profitability and a more conservative financial risk profile during the next one to two years. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Metals Industry, June 22, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed Gerdau S.A. Corporate Credit Rating BBB-/Stable/-- Brazilian Rating Scale brAAA/Stable/-- Gerdau Ameristeel Corp. Corporate Credit Rating BBB-/Stable/-- Gerdau S.A. GTL Trade Finance Inc. Gerdau Ameristeel US Inc. Gerdau Holdings Inc. Gerdau Trade Inc. Senior Unsecured BBB- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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