Crisis in the steel market and disbursements for expansion put pressure on financial leverage
02/24/2025
Steel, the largest business of Companhia Siderúrgica Nacional (CSN), is no longer the main guarantor of businessman Benjamin Steinbruch’s group. Faced with adverse times for the sector globally and high investments in plant modernization, the group’s steel arm has been consuming cash, while the iron ore arm, under CSN Mineração, has become the main source of immediate liquidity.
At the end of the third quarter, of the approximately R$19.3 billion the group had in cash, R$14.5 billion was in the mining company. While steel generated 14% of EBITDA between January and September 2024, the latest data available, ore accounted for 56%.
CSN Mineração (CMIN) has been used to meet the group’s other commitments. In January, it signed a contract with the parent company (which houses the steel business) for the assignment of export receivables, with an estimated value of $1 billion for 2025. The funds will be used to amortize export prepayment contracts, advances on foreign exchange contracts or “similar CSN contracts”.
According to the statement, the contract provides for “governance” between the respective financial areas, “to ensure that only the excess ballast that CMIN would not use is transferred to CSN”.
In a report at the end of January, BNP Paribas analyst Alexis Panton wrote that CSN seems to be facing “an increasingly complicated liquidity situation” outside of mining. “We were not surprised by the operation, given CSN’s short-term obligations and extremely high negative cash flow outside CMIN,” he pointed out.
At the end of September, the analyst added, the parent company had short-term obligations of around $3 billion, including debt, leasing, accounts payable, financing to suppliers and prepayments, also without considering CSN Mineração.
The weakness of the steel industry, especially from the second half of 2022 onwards—when competition conditions in the global market became more difficult with the oversupply of cheap Chinese steel—and CSN’s high disbursements to diversify its business put pressure on debt.
The goal was to end 2024 with leverage measured by the ratio of net debt to EBITDA of 2.5 times. At the end of last year, however, CSN revised the target and is now looking to reach 3 times by the end of 2025. In September, this ratio stood at 3.34 times. With more cash than debt, CMIN had negative leverage.
About ten days ago, Moody’s cut CSN’s credit rating to “Ba2” from “Ba3”, raising the outlook from negative to stable, because of concerns about the group’s leverage trajectory over the next 12 months—for the period, the outlook for steel and ore is not positive.
“We had already changed the rating outlook to negative in September, but our premise was that leverage would be maintained, but CSN has released some news in recent months that has led to this reassessment,” Carolina Chimenti, a senior analyst at Moody’s, told Valor.
In recent years, the group has spent billions of reais acquiring assets. In cement, it bought Cimentos Elizabeth and LafargeHolcim in Brazil. In energy, it took CEEE Geração and, in logistics, the most recent operation was the proposal of R$742.5 million for 70% of the owner of Tora Transportes.
These expenditures, combined with the worsening results in the steel industry, have led analysts to adopt a more cautious stance on CSN’s shares and there are fears about the leverage commitments assumed in debt contracts.
In an extrapolation, without considering the EBITDA generated by the mining company, the BNP Paribas analyst arrived at indexes that would breach debt clauses agreed with creditors. But the bank’s calculation, according to a source close to the company, is inappropriate, because it considered holding debts (also for investment in all subsidiaries) and excluded the mining business from the EBITDA used to estimate these ratios.
Ms. Chimenti, with Moody’s, highlighted the acquisition of the parent company of Tora Transportes, as well as the investment plan announced by the group at the end of last year, as factors that influenced the credit rating downgrade. The agency believes that CSN’s leverage will remain between 4.5 and 5 times next year.
“CSN has debt maturity covenants, the lowest of which is 4.5 times [1.1 times above the leverage in September]. We are calm about the trend towards reducing the company’s leverage,” the group’s financial and investor relations director, Marco Rabello, told Valor.
According to the executive, the target announced at the end of last year is to be below three times by the end of 2025. However, in the medium and long term, the plan is to seek “much lower” leverage.
“One of CSN’s great advantages is its asset portfolio, which is less valued than it could be and which opens up space for future strategic liquidity actions. An example of this is the Infrastructure and Logistics vehicle, which we discussed at our CSN Day,” he added.
As well as the plans already announced for CEEE (to look for a minority partner) and for CMIN (to go public and bring in a minority partner), CSN still has 100% of two businesses, Cimentos and CSN Infra, which could follow the same path, including a potential public offering of shares.
In addition, given the strong consolidated cash position, which did not yet take into account the R$4.4 billion from the sale of the mining company’s 10.7% stake to Itochu Corporation at the end of last year, the group could use part of these resources to exchange more expensive debts and lengthen its indebtedness over the course of 2025.
In Moody’s assessment, CSN’s high cash position and longer debt amortization profile ease the group’s situation. “The company doesn’t have a history of making structural changes to its debt, but at the current rating, it doesn’t bother us.”
Ms.Chimenti draws attention to the fact that much of the liquidity is concentrated in CSN Mineração. “We would like to see this leverage more equalized between the subsidiaries,” he said. From a risk point of view, it would be better for the holding company not to depend so much on dividends from CSN Mineração.
Other companies in the steel sector, such as Gerdau and Usiminas, have carried out deeper restructuring of their debts since the sector’s last crisis, between 2015 and 2016, while CSN has reduced leverage through operational growth, Ms. Chimenti recalled. “Today, CSN has the lowest rating among the three.”
For Moody’s, the new stable outlook of the “Ba2” rating indicates the expectation that CSN will maintain a trajectory of reducing leverage to below 3 times and a cash position of around R$15 billion. “These targets increase the visibility of the company’s ability to maintain robust credit metrics,” the agency noted.
The other two main rating agencies, Fitch Ratings and S&P Global Ratings, have a “BB” global credit rating for CSN, which is equivalent to Moody’s “Ba2” rating. The former has a stable outlook, while S&P changed its from stable to negative last August.
Bank analysts who follow CSN and CSN Mineração shares are also wary of the companies. Valor has learned that nine major institutions cover CSN shares, while another 12 cover CSN Mineração. All the banks that cover CSN also cover CSN Mineração, however, three —BTG Pactual, Jefferies and Morgan Stanley—only cover the mining unit’s shares.
Of the nine institutions that cover CSN, seven have a neutral recommendation and two have a sell recommendation, with an average target price for the shares of R$11.90, a potential increase of 35% over Thursday’s close (20). In the case of CSN Mineração, there is one buy recommendation, seven neutral and four sell, with an average target price of R$5.60, a potential rise of 4.5%.
J.P. Morgan, the last bank to make changes to its estimates for the companies, noted that CSN’s results should continue to be pressured by lower steel prices amid the intense volume of imports from China. Analysts Rodolfo Angele and Thatiane Martins Candini wrote in a report that CSN Mineração’s shares have “stretched multiples”, i.e. they are overvalued in relation to the company’s financial indicators. The bank recommends selling the stock because it believes there are “more attractive names” in the sector in Latin America, such as Vale.
Mr. Rabello said that the company has already signaled a potential improvement in the steel industry’s performance following recent investments in Volta Redonda (Rio de Janeiro state). “As we’ve said before, the improvement in the operational and commercial scenario in ore, cement and steel, which will benefit from the investments made in Volta Redonda, will help with deleveraging,” he said, without providing additional information on the potential sale of the group’s assets or restructuring of liabilities.
CSN is also counting on the potential receipt of R$3.1 billion from rival Ternium, related to the Italian-Argentine company’s entry into Usiminas’ capital, to strengthen its liquidity position. CSN, which owns 12.9% of the steel company in Minas Gerais, argues that there was an exchange of control when Ternium bought the initial 27.7% of the voting capital of the steel company in Minas Gerais—which belonged to Votorantim and Camargo Corrêa and to the Usiminas Employees’ Fund—and has been seeking compensation in court for over ten years.
Until the middle of last year, Ternium had won every round of the dispute. In June, however, the Superior Court of Justice changed the course of the case by deciding to pay compensation to CSN. In December, the 3rd Panel of the court upheld the decision, but reduced the amount to R$3.1 billion from R$5 billion.
The Italian-Argentine group warned that it would appeal, and everything indicates that the case will reach the Supreme Court, in a battle that could take even longer. Along with its third-quarter results, Ternium reported that it had reversed $404 million of the provision relating to the litigation, given the decision of the 3rd Panel of the STJ.
*By Stella Fontes e Felipe Laurence — São Paulo
Source: Valor International