Gerdau Renegotiates Half Its Debt

Debt Renegotiation Does Not Change Our Negative View

Gerdau (GGB - Analyst Report) announced the renegotiation of US$3.7 billion, from an outstanding net debt of US$7 billion. That's good news for GGB, mainly considering that the company is highly leveraged and that the renegotiation of the debt is an absolute necessity.

Just to have an idea of the degree of leverage of GGB, currently the company's market cap is around US$14.8 and its net debt is US$7 billion, representing more than 2x 2009 expected EBITDA.

Gerdau also got the approval from 40 financial institutions for "temporary flexibility" of debt covenants until Sept. 30, 2010. In its statement, the company mentioned some "completely atypical" factors have cut cash generation.

As we expected, Gerdau will have a hard time ahead facing the recession in the U.S. market and high financial expenses. In order to compensate the bad news, the company also announced it will resume the operations of the furnace 1 from Gerdau Acominas in Brazil.

However, according to GGB it will be a slowly process until the "complete reheating of the market." Even worse, the furnace 2 from Gerdau Acominas will stop working in next July until the market "reheats."

The renegotiation of the debt was positive, but mandatory. In fact, the banks had no other option but to renegotiate the debt and relieve covenants.

Moreover, the company recognized in its statement that demand remains weak and the short-term outlook does not seem to be improving. We see no reason to change our Sell recommendation on GGB. Quite the contrary, if we consider the recent appreciation on the stock.