Fitch Affirms Gerdau's IDRs at 'BBB-'; Outlook Stable

CHICAGO--(Business Wire)--
Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and outstanding
debt ratings of Gerdau S.A. (Gerdau) as follows:

--Foreign currency IDR at 'BBB-';

--Local currency IDR at 'BBB-';

--National scale rating at 'AA+(bra)' ;

--GTL Trade Finance US$600 million perpetual notes long-term rating at 'BBB-';

--GTL Trade Finance US$1.5 billion 7.25% notes due Oct. 20, 2017 long-term
rating at 'BBB-'.

The Rating Outlook is Stable.

The affirmation of Gerdau's investment grade ratings amid challenging operating
conditions reflects Fitch's view that Gerdau is well-positioned to withstand the
global slump in steel consumption having accumulated a strong balance sheet
following the preceding years of record steel demand. The ratings are also
supported by the company swiftly adjusting its production output and cost
structure to reflect the deteriorating market conditions since the fourth
quarter of 2008 (4Q'08) and ability to swiftly resume operations to meet the
gradual increase in steel demand beginning to materialize at the end of 2Q'09.
Mini-mills account for approximately 75% of Gerdau's total production output,
which enables the company to adjust its output swiftly to reflect current demand
levels and placing it at a cost advantage when compared to major blast-furnace
operators.

Good Access to Liquidity, Manageable Amortization Profile: Further supporting
the ratings and Stable Outlook is Gerdau's solid liquidity position as of June
30, 2009 with cash and marketable securities of BRL6.2 billion (USD3.2 billion),
of which USD1.2 billion is denominated in BRL and the remainder in USD. The
company also has additional access to liquidity in the form of two committed and
undrawn credit lines, together totaling over BRL2 billion (USD1 billion),
comprised of an asset-backed loan of BRL1.6 billion (USD950 million) at
Ameristeel's GNA Partners subsidiary level of which 57% is backed by collateral,
and a BRL195 million (USD100 million) revolving credit facility at Macsteel. The
maturity dates for these credit lines are Oct. 28, 2010 and May 27, 2011,
respectively. Gerdau also has manageable long-term debt maturities of BRL2.5
billion (USD1.3 billion) in the second half of 2009 (2H'09) which includes the
BRL800 million (USD405 million) senior notes prepayment brought forward from
2011; BRL1.9 billion (USD973 million) in 2010; and BRL2.8 billion (USD1.4
billion) in 2011. As of June 30, 2009, Gerdau's short-term debt to long-term
debt ratio was 0.1 times (x).

Positive Free Cash Flows after Debt Service Expected: Fitch expects the company
to generate positive free cash flow (FCF) in 2009 as a result of an aggressive
reduction in capital expenditures from over BRL4 billion (USD2.2 billion) in
2008 to BRL1.3 billion (USD666 million), and a positive net working capital
inflow. BRL3.3 billion (USD1.7 billion) of the capital expenditure in 2008
related to the MacSteel acquisition, which increased Gerdau's specialty steel
capacity from 2.5 million to 3.7 million metric tons. As of June 30, 2009,
Gerdau recorded a net working capital inflow of over BRL2 billion (USD983
million) following inventory destocking, influenced by the reduction in fixed
production costs and the appreciation of the BRL against the USD. Fitch also
expects the cost cutting measures implemented at the end of 2008 and beginning
of 2009 to show a positive cash flow impact in 2H'09. FCF is also expected to be
positive in 2010 and 2011 as a result of ongoing working capital improvements.
Dividend payments are also anticipated to be significantly lower due to the
reduced net income levels.

Gerdau's consolidated operating EBITDA in 2008 of BRL10 billion (USD5.5 billion)
was mostly generated by the company's Brazilian operations (52%) followed by
North America 25%, Specialty Steel including Europe 14%, and rest of Latin
America 9%. The concentration of the company's cash flow in Brazil is proving to
be a positive in the current environment as demand in the country is stronger
than in North America and Europe. Historically, these operations have also had
the highest profit margins. During 2008, the company's Brazilian EBITDA margins
were 37%, while its margins in the other markets varied between 17% and 21%.
Fitch expects a gradual increase in steel consumption in Brazil and throughout
the region in the second half of 2009, with more significant growth in 2010.
Some of the increase in demand will be driven by stimulus measures taken by the
Brazilian government and other governments in the region.

Prepayment of Ameristeel Bonds Indicate Commitment to Deleveraging: Total debt
as of June 30, 2009 was BRL18.9 billion (USD9.7 billion) which had a weighted
average cost of debt of 5.9% per annum and average maturity life of 5.3 years,
of which USD7.2 billion was denominated in USD, USD1.6 billion in BRL, USD500
million in EUR, and USD400 million in other currencies of various operations.
Gerdau Ameristeel announced its decision to accelerate a USD405 million
prepayment of its 10 3/8% senior notes due 2011. This redemption will be made on
Aug. 31, 2009 and is part of management's strategy to deleverage the company in
line with the reduction in EBITDA generation to pre-crisis 'normalized' levels.

Leverage Ratios Expected to Rise in 2009: On a last twelve month (LTM) basis,
Gerdau's total debt/EBITDA ratio as of June 30, 2009 was 2.8x, an increase on
2.3x seen at the end of 2008. The company's LTM Net debt/EBITDA of 1.9x and
Funds from Operations (FFO) adjusted leverage of 3.0x also marked an increase
from 2008 levels of 1.7x and 2.6x, respectively. However, Gerdau's debt total
debt for the same period actually reduced from BRL23.2 billion (USD10 billion)
to the current level of BRL18.9 billion (USD9.7 billion), with the primary
driver of increasing leverage ratios being the significant reduction in EBITDA
being generated. Management's strategy is to deleverage the company in line with
the EBITDA reduction to keep a reign on the rising leverage and have recently
renegotiated debt covenant levels to avoid any possible breaches. Management is
also aided in keeping leverage ratios under control by the appreciation of the
Brazilian Reais versus the USD. Fitch expects total debt/EBITDA ratios to
continue rising to levels around 3.5 to 4.0x by the end of 2009, which falls
within the revised covenant test levels. Fitch will monitor leverage ratios
closely in the coming year and views a swift reduction to pre-crisis normalized
levels of around 2.5x from the anticipated peak of around 4.0x at the end of
2009 favorably in view of the company maintaining its investment grade profile.

Financial Covenant Ratio Reset Indicates Management Assertiveness: Short-term
concerns with regards to the possible breach of a 4.0x gross leverage covenant
subsided following the company successfully renegotiating its financial covenant
levels with the relevant banks. The covenant reset, valid from June 2009 up to
September 2010, includes the temporary substitution of the Gross Debt/EBITDA
covenant from 4.0x to a Net Debt/EBITDA ratio of 5.0x; a temporary substitution
of the EBITDA/Interest Expense covenant from 3.0x to an EBITDA/Net Interest
Expense covenant ratio of 2.5x; and a maximum Gross Debt level of USD11 billion.
The estimated cost of adjusting the covenants ranges from USD20 million to USD60
million.

Potential Rating and Outlook Drivers: Factors that could lead to consideration
of a Negative Outlook or downgrade include a prolonged duration of depressed
worldwide demand for steel products that would fundamentally change Gerdau's
medium-term capital structure. In addition, a change in management strategy with
regards to conservative capital expenditure during the crisis or debt-funded
acquisitions could also negatively impact Gerdau's credit profile, as would a
significant erosion of liquidity position. Factors leading to a consideration of
a Positive Outlook or upgrade include successfully maintaining a conservative
capital structure throughout the downturn and improving on its pre-crisis
'normalized' credit profile, as well as emerging from the crisis with an
optimized and improved competitive position globally.

Fitch's rating definitions and the terms of use of such ratings are available on
the agency's public site, www.fitchratings.com. Published ratings, criteria and
methodologies are available from this site, at all times. Fitch's code of
conduct, confidentiality, conflicts of interest, affiliate firewall, compliance
and other relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings
Jay Djemal, +1-312-368-3134 (Chicago)
Joe Bormann, CFA, +1-312-368-3349 (Chicago)
Ricardo Carvalho, +55-21-4503-2600 (Rio de Janeiro)
Cindy Stoller, +1-212-908-0526 (Media Relations, New York)
cindy.stoller@fitchratings.com

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