Fitch Ratings has downgraded the foreign and local currency Issuer Default Ratings (IDRs) of Usinas Siderurgicas de Minas Gerais S.A. (USIMINAS) to 'B-' from 'B+' and downgraded the national rating to 'BBB-(bra)' from 'BBB+(bra)'. Fitch has also placed the foreign and local IDRs of Usiminas on Rating Watch Negative.

The downgrade reflects Usiminas' unsustainable credit profile amidst a scenario of weakening steel sector fundamentals in both the domestic and global markets. Factored into the downgrade is Usiminas' decision to suspend its primary steel production activities at its Cubatao Plant, which has a crude steel nominal capacity of 4.5 million tons. The downsizing of the company's steel production will result in some initial cash outlays related to the shutdown of its blast furnace, but should lower fixed costs thereafter.

Fitch took into consideration Usiminas' vertically integrated steel operations coupled with its historically strong presence in the Brazilian flat steel market. While sector conditions will likely remain poor in both the domestic and export markets, Fitch believes Usiminas' degree of operating leverage is high and its low position on the steel cost curve would likely result in swift deleveraging under more normal market conditions.

Usiminas was placed on Rating Watch Negative due to high cash flow burn and upcoming maturities due in 2016. The liquidity situation at Usiminas is dismal. Absent a refinancing of its short-term maturities the company will have extreme difficulty servicing its debt. Fitch believes Usiminas has strong relationships with its banks and will be successful in extending maturities. Fitch also believes shareholder support could be forthcoming.

KEY RATING DRIVERS

Dire Liquidity Position: Fitch believes Usiminas' current cash on hand as of Dec. 31, 2015 cannot cover maturities through 2016. Usiminas will have difficulty meeting its financial obligations during 2016 unless the company is successful in refinancing its bank debt, which constituted approximately 79% of total debt as of Sept. 30, 2015. Usiminas breached its net debt/EBITDA covenant of 3.5x at year-end 2015. Fitch does not believe Usiminas will be able to meet this covenant requirement over the next two years, resulting in additional waivers required.

Leverage to Rise: Fitch projects Usiminas to report net leverage well above 10.0x for 2015 and to further decline over the coming quarters due to deteriorating operating cash flow and sustained free cash flow burn. Weakening credit metrics will go unabated unless Usiminas receives a significant equity injection and/or completes asset sales during 2016. 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 the current market conditions. The company's current credit profile is unsustainable as Fitch expects EBITDA generation to remain dismal in 2016.

Cash flow To Remain Under Pressure: Fitch projects Usiminas' funds from operation (FFO) to be around BRL340 million and negative free cash flow (FCF) in 2015 compared to FFO and FCF of BRL1.2 billion and BRL110 million in 2014. Declining international steel prices, increased energy prices, high tax and interest rate burdens, and higher raw material costs have put downward pressure on the company's cash flow generation which will persist in 2016. The company's expectations of lower capex requirements and improved working capital management will likely not lead to any material changes in cash flow generation in the short term.

Progressive Deterioration of Domestic and Worldwide Steel Markets: Usiminas' operating performance was negatively impacted by the continued decline for domestic steel in Brazil. Flat steel consumption in Brazil was down 18% for the first nine months of 2015 with limited expectations of recovery over the near term. Brazil's industrial sector has declined for the 18th consecutive month with continued weakening in the automotive, household appliances, and civil construction sectors. The excess supply of global steel production capacity was approximately 735 million tons as of September 2015, putting downward pressure on international market prices and making high cost producers economically unfeasible. China alone exported 130 million tons of steel annualized through September 2015, a key driver of the lowest global steel prices seen in a decade.

Brutal Operating Environment to Continue to Challenge Profitability: Usiminas reported a material decline in financial results during the first nine months of September 2015, which Fitch expects to persist during 2016. Domestic steel sales volumes declined 24% as weaker demand levels were experienced across many of Usiminas' 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 the nine months ended September 2015, an increase from 17% from the prior year period. However, the offset in volumes sold in the domestic market compared to the export market will likely further lead to profitability deterioration due to lower pricing power and increased working capital needs for exports.

Unprofitable Iron Ore Business: Usiminas' has no ability to generate positive cash flow 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. Usiminas' cash cost per ton for iron ore was BRL51.3 in the third quarter of 2015 (3Q15), still well above current iron ore prices. Fitch believes it is not likely that Usiminas will gain port access in the near term.

KEY 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 could downgrade Usiminas' ratings further if the company is unable to extend its debt maturities due in 2016 and 2017 to beyond 2018 and/or is unable to receive an equity injection in the next three months.

An upgrade of the ratings for Usiminas is not likely in the near term. Fitch could remove the Rating Watch Negative if the company refinances its maturities due over the next two years, successfully receives an equity injection, performs asset sales, and/or there is material improvement in domestic steel demand in Brazil during 2017.

LIQUIDITY

Usiminas' liquidity position has declined to BRL2.4 billion as of Sept. 30, 2015 compared to BRL2.9 billion as of Dec. 31, 2015, which Fitch expects to further erode. The company's cash-to-short ratio was 1.3x as of Sept. 30, 2015 compared to 1.7x as of Dec. 31, 2015. Usiminas will face refinancing issues for its amortization profile during 2016 and beyond if it does not lengthen its maturity schedule. Usiminas breached its net debt/EBITDA covenant of 3.5x at year end on its bank debt, but received covenant waivers.

FULL LIST OF RATING ACTIONS

Fitch has downgraded Usiminas' ratings as follows:

--Foreign currency long-term IDR to 'B-' from 'B+';

--Local currency long-term IDR to 'B-' from 'B+';

--National scale long-term rating to 'BBB-(bra)' from 'BBB+(bra)';

--US$400 million notes due 2018 to 'B-/RR4' from 'B+/RR4'.

The company is placed on Rating Watch Negative.

Date of Relevant Rating Committee: Jan. 29, 2016.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998705

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