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1、Credit,GlobalMarketsResearch,EmergingMarkets,5.0,20,4.5,Gerdau,15,7.0 20,3.5,330,310,7.0 20,Global Emerging Markets BrazilSteel6 November 2012,CSNCSN vs.Gerdau:close ourswitch trade opportunityWe close our switch trade between Gerdau 20s,21s into CSN 19s,20sSince we last reviewed CSN and Gerdau cred
2、it fundamentals and relative value on27 August,CSN 19s and 20s have tightened approximately 35bps and 41bps,respectively,while Gerdau 20s and Gerdau 21s experienced further spreadcompression of 10bps and 37bps,respectively.At current levels,we believe CSNnotes are at fair value if compared to simila
3、rly rated peers,whereas we believeGerdau 20s and Gerdau 21s trade at tight spread levels.In addition,we continueto question the spread premium between CSN and Gerdau as we do not see anyfundamental reason that could support such a divergence(15 to 40bps dependingon the notes).Following the rally exp
4、erienced in recent weeks,we close ourswitch trade opportunity,but maintain our Sell recommendation on Gerdau 20sand 21s given the notes tight spread levels.At the same time,we lower CSN 19sand 20s to Hold from Buy based on valuation.CSN 3Q12 results highlightsCSNs 3Q12 results were marked by a bette
5、r-than-expected performance of thecompanys steel business and disappointing mining operations driven largely bylower iron ore prices during the quarter.Going forward,while we believe leveragewill still deteriorate in 4Q12,we do not see much downside for the companysoperations,as the Brazilian econom
6、y picks up,import taxes take effect in 2013and iron-ore prices stabilize in the USD100-120t levels.In addition,based onmanagements comments,it seems that any M&A activity,if executed,willinvolve some sort of financial engineering or partnership that does not hurt CSNsleverage and liquidity metrics.G
7、erdau 3Q12 results highlightsGerdau reported disappointing 3Q12 results reflecting weak operations in all itsbusiness units,with the exception of Brazil.This poor operational performanceresulted in declining margins,higher leverage and tightening liquidity in thequarter.In addition,the company annou
8、nced it has ceased its efforts to identify astrategic partner for its iron ore assets.While this might be positive in the longerrun,we believe possible higher capex requirements might weigh on thecompanys leverage and liquidity in the short-term.Figure 1:Outstanding issues,Recommendation ChangeResea
9、rch TeamNatalia CorfieldResearch Analyst(+1)212 Denis ParisienResearch Analyst(+1)212 250-Yield(%)vs.duration(years)YieldCSN 6.5CSN6.875 194.0CSN 10.0 Gerdau5.75 21Gerdau7.25 173.01.5 3.5 5.5 7.5DurationZ-spread(bps)vs.duration(years)Z-spreadCSN CSN 6.56.875 19 20CSN 10.015290 Gerdau7.25 17 Gerdau27
10、0 Gerdau5.75 212501.5 3.5 5.5 Duration 7.5For risk disclosures please refer to p.3,Mid,Mid,Spd,Total,IssueCSNABZ 9.75%Dec13CSNABZ 10.00%Jan15CSNABZ 6.875%Sep19CSNABZ 6.5%Jul20CSNABZ 7.0%PerpGGBRBZ 7.25%Oct17GGBRBZ 7.00%Jan20GGBRBZ 5.75%Jan21,Amount o/sUSD550mUSD379mUSD750mUSD1200mUSD1000mUSD1500mUSD
11、1250mUSD1250m,Mdy/S&P/FiBa1/BBB-/BBB-Ba1/BBB-/BBB-Ba1/BBB-/BBB-Ba1/BBB-/BBB-Ba1/BBB-/BBB-N.A./BBB-/BBB-N.A./BBB-/BBB-NR/BBB-/BBB-,price108.00115.13115.63113.38103.50115.88117.75111.13,yield2.373.274.234.436.803.714.124.14,OAS218298320325423305304285,Z-spread205289311317445294295278,to sov23526524526
12、5313255234223,return237233139131121162142122,Dur1.031.945.536.0513.174.215.696.54,Source:Deutsche BankDeutsche Bank Securities Inc.All prices are those current at the end of the previous trading session unless otherwise indicated.Prices are sourced from localexchanges via Reuters,Bloomberg and other
13、 vendors.Data is sourced from Deutsche Bank and subject companies.DeutscheBank does and seeks to do business with companies covered in its research reports.Thus,investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report.Investors should co
14、nsider this report as only a singlefactor in making their investment decision.DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072/04/2012.,6 November 2012,Steel CSN,CSN vs.GerdauSince we last reviewed CSN and Gerdau credit fundamentals and relative value on 27 August,CSN 19s
15、and 20s have tightened approximately 35bps and 41bps,respectively,while Gerdau20s and Gerdau 21s experienced further spread compression of 10bps and 37bps,respectively.At current levels,we believe CSN notes are at fair value if compared to similarlyrated peers,whereas we believe Gerdau 20s and Gerda
16、u 21s trade at tight spread levels.Inaddition,we continue to question the spread premium between CSN and Gerdau as we donot see any fundamental reason that could support such a divergence(15 to 40bpsdepending on the notes).Figure 2:1 year spread(bps)development500450400350300250,CSN 6.5 20,Gerdau 7.
17、0 20,Gerdau 5.75 21,CSN 6.875 19,Source:Deutsche BankWe believe Gerdaus focus on long steel has weighed positively on the companys notesgiven the good prospects for infrastructure in Brazil.However,the company continues toexperience declining margins,increasing leverage and tightening liquidity,thus
18、 reflecting thegeneral challenging scenario for steel manufacturers(please refer to page 10 for more detailson Gerdaus credit metrics).In addition,Gerdaus recent decision to cease looking for astrategic partner for its mining assets might require higher capex and a longer period torevert the current
19、 trend of higher leverage and tightening liquidity.Declining iron ore prices have,in turn,negatively weighted on CSNs notes.While this hasalso translated into lower margins and higher leverage,CSN still presents significantly highermargins than Gerdaus and a more robust liquidity position with cash/
20、STD at 7.3x comparedto Gerdaus cash/STD of 1.0 x in 3Q12.Most importantly,with iron-ore prices at a newequilibrium in the range of USD100-120t,we believe CSNs mining operations can recover inthe next few quarters from the levels posted in 3Q12.In addition,while the risk of M&Aactivity has been a con
21、stant threat and has been recently exacerbated by market talks about apossible acquisition of CSA,management has stated that the company will not take any stepthat could materially harm its leverage.As such,we believe that any M&A activity,ifexecuted in the short-to-mid-term,should be through some s
22、ort of financial engineeringand/or partnership.Figure 3:Vertical integration and credit metrics,Cash,Total debt,LTM net lev.,Cash/STD,Capex/sales,EBITDA mar.,CSNGerdau,BRL14.5bnBRL3.0bn,BRL30.2bnBRL15.0bn,3.3x2.8x,7.3x1.0 x,18.7%8.8%,25.2%10.5%,Source:Deutsche Bank,Page 2,Deutsche Bank Securities In
23、c.,6 November 2012,Steel CSN,Overall,we maintain our view that CSN and Gerdau should trade flat to each other.Althoughoperating in different segments of the steel industry,they were both impacted by the generaldifficult scenario for steel manufacturers with increased competition,higher raw materialc
24、osts and decreasing demand.While iron ore prices should continue to be a key factorimpacting CSNs trading levels,Gerdaus investments on its mining project and tighteningliquidity position might also impact the companys trading performance.In addition,givencurrent tight spreads of Gerdau 20s and Gerd
25、au 21s,we believe the notes could experiencesome correction.We close our switch trade idea,but reiterate our Sell recommendation onGerdaus 20s and 21s and lower CSN 19s and 20s to Hold from Buy following the rallyexperienced by the notes in recent weeks.Risk factorsWe see a pronounced decline in iro
26、n ore prices as well as a significant improvement ofGerdaus operations beyond expectations as the main risks to our recommendation.Otherrisk factors include(but are not limited to):aggressive M&A activity on CSNs side,exposureto FX volatility,further increases in raw material costs,further decelerat
27、ion of the Brazilianand Chinese economies.,Deutsche Bank Securities Inc.,Page 3,6 November 2012,Steel CSN,Bond ValuationFigure 4:Evolution of 2019-2021 yields(%),6.565.554.54,5.554.54,CSN 6.5 20,Gerdau 7.0 20,Gerdau 5.75 21,CSN 6.875 19,CSN 6.5 20,Gerdau 7.0 20,Gerdau 5.75 21,CSN 6.875 19,Source:Deu
28、tsche BankFigure 5:Evolution of 2019-2021 prices(USD)120119,11511010510095,117115113111109107105,CSN 6.5 20,Gerdau 7.0 20,Gerdau 5.75 21,CSN 6.875 19,CSN 6.5 20,Gerdau 7.0 20,Gerdau 5.75 21,CSN 6.875 19,Source:Deutsche BankFigure 6:Evolution of 2019-2021 spreads(bps),45043041039037035033031029027025
29、0,450430410390370350330310290270250,CSN 6.5 20,Gerdau 7.0 20,Gerdau 5.75 21,CSN 6.875 19,CSN 6.5 20,Gerdau 7.0 20,Gerdau 5.75 21,CSN 6.875 19,Source:Deutsche Bank,Page 4,Deutsche Bank Securities Inc.,6 November 2012,Steel CSN,Figure 7:Mid yield(%)vs.duration(years)Mid yield6.0,5.55.0,Usiminas 7.25 1
30、8,MAGGBZ 7.875 20,4.5,Usiminas 8.25 16,CSN 6.875 19Gerdau 7.0 20,CSN 6.5 20ODB 7.0 20 Gerdau 5.75 21,ODB 6 23,4.0,3.5,CSN 10.0 15,Gerdau 7.25 17,ODEBRE 6.35 21,Votora 7.75 20Votora 6.625 19,Votora 6.75 21,ODB 5.125 22,3.02.5CSN 9.75 132.0,1.51.0,Votora 7.875 14,1.0,2.0,3.0,4.0,5.0,6.0,7.0,8.0,Durati
31、onSource:Deutsche Bank,Deutsche Bank Securities Inc.,Page 5,6 November 2012,Steel CSN,CSN-3Q12 HighlightsCSNs 3Q12 results were marked by a better-than-expected performance of the companyssteel business and disappointing mining operations driven largely by lower iron ore pricesduring the quarter.Goi
32、ng forward,while we believe leverage will still deteriorate in 4Q12,wedo not see much downside for the companys operations,as the Brazilian economy picks up,import taxes take effect in 2013 and iron-ore prices stabilize in the USD100-120t levels.Inaddition,based on managements comments,it seems that
33、 any M&A activity,if executed,will involve some sort of financial engineering or partnership that does not hurt CSNsleverage and liquidity positions.CSN registered higher-than-expected steel volumes supported by the domestic marketSteel volumes were up 12.5%qoq and 34.7%yoy to 1.6mt driven primarily
34、 by CSNsdomestic operations.This marks a shift from 1H12 when the export market posted thelargest expansion and reflects possibly the recent renewed government incentives to supportthe local industry as well as a revamp in inventory levels.According to CSN,the higherdomestic demand originated notabl
35、y from the automotive,pipe line and civil constructionsectors.Iron ore sales volumes also recorded a quarterly increase(+7.6%),but continued tocompare unfavorably on an annual basis(-17.7%)reflecting the general weaker globaldemand.Higher revenues from steel have offset the sharp drop in income from
36、 CSNs miningoperationsTotal revenues were up 3.1%qoq and 0.6%yoy to BRL4.3bn(USD2.1bn)supported largelyby the companys steel operations which offset the sharp drop in revenues from CSNsmining segment.In particular,despite the higher iron ore volumes in the quarter,the incomefrom CSNs mining operatio
37、ns decreased 16.1%qoq reflecting a 26.0%decline in averageiron ore prices in the period.Of note,the 26.0%average price drop was higher than the20.0%reduction in the Platts reference price,suggesting that CSN had to give higherdiscounts than the average market participants.Steel,logistics and cement
38、helped to counterbalance the sharp decline in margins ofCSNs mining operationsThe companys EBITDA reached BRL1.1bn(USD530m)in 3Q12,down 4.0%qoq and 36.8%yoy.Of note is the decreasing contribution from the mining segment that made up 35.2%ofCSNs total EBITDA generation in 3Q12 vs.50.3%in 2Q12.This ha
39、s translated into a furtherdecline of CSNs EBITDA margin to 25.0%from 27.0%in 2Q12.Positively,CSNs steel,logistics and cement operations helped to counterbalance the impact of reduced miningmargins.Steel margins increased to 19.0%in 3Q12 from 18.0%in 2Q12 whereas logisticsregistered a 583bps qoq ris
40、e to 39.4%in 3Q12 and cement reached 22.0%from 6.0%in2Q12.Cost control measures and capital discipline should contribute to avoid sharperleverage deteriorationCSNs total debt grew 3.1%qoq to BRL30.2bn(USD14.9bn)reflecting primarily the issuanceof debentures in the local market to extend the companys
41、 debt maturity profile.Net debtwas stable sequentially at BRL15.6bn(USD7.7bn),but net leverage edged higher to 3.3x in3Q12 from 2.9x in 2Q12 mainly as a result of declining LTM EBITDA.We believe this trend islikely to continue in 4Q12 given CSNs weaker EBITDA generation in recent quarters,but weexpe
42、ct the company to counterbalance reduced operational results with cost controlmeasures and capex discipline avoiding a sharper deterioration of its net leverage in the nextquarter.In particular,during CSNs conference call,when asked about the increase in,Page 6,Deutsche Bank Securities Inc.,6 Novemb
43、er 2012,Steel CSN,leverage,company officials stated that investments will be made selectively withoutcompromising CSNs debt levels.Cash position has remained robust and better WC management has generatedBRL131m in 3Q12Despite higher reported capex in 3Q12(+72.5%qoq),the companys liquidity position h
44、asremained robust with cash/STD debt at 7.3x in the quarter,registering an improvement from5.6x in 2Q12.This results both from an increase in CSNs cash balance(6.3%qoq)and areduction in its short-term debt(18.2%qoq)with short-term debt making up 6.6%of thecompanys total debt in 3Q12 vs.8.3%in 2Q12.I
45、n addition,CSN has managed to improveworking capital by BRL131m(USD64m)through better management of receivables,payablesand,notably,inventory.The increase in capex refers largely to the companys miningexpansion plans,but the Transnordestina project continues to absorb a large portion of CSNsexpendit
46、ures(25.7%of CSNs total capex in 3Q12).As we understand,CSN has alreadyspent BRL3.7bn(USD1.8bn)out of an initial budget for the project of BRL4.5bn(USD2.2bn)and is currently negotiating with the Ministry of Transport to make the project economicviable and feasible.Better prospects for the Brazilian
47、economy,import taxes,stable iron ore prices andcapital discipline should bring some near-term relief to CSNGoing forward,we believe the better-than-expected performance of CSNs steel operationsmight not be repeated in 4Q12 given the still challenging outlook for the sector on the backprimarily of th
48、e competition from imports.That being said,we do not expect much downsidefrom current levels as the Brazilian economy picks up and as the new import taxes take effectin 2013.As for CSNs mining business,with iron ore prices reaching a new equilibrium in theUSD100-120t range,we also believe downside f
49、rom current levels is limited and expect thecompanys operations in this segment to improve in 2013.In addition,based on managementcomments during the companys conference call,it seems to us that the increasing leverageis a concern.As such,we believe capex discipline might be a priority and,very impo
50、rtantly,any M&A activity,if executed in the short-to-mid-term,should be through some sort offinancial engineering and/or partnership that do not hurt CSNs leverage position.,Deutsche Bank Securities Inc.,Page 7,6 November 2012,Steel CSN,Gerdau-3Q12 HighlightsGerdau reported disappointing 3Q12 result
