Gerdau S.A.
--Foreign currency long-term IDR at 'BBB-';
--Local currency long-term IDR at 'BBB-';
--National scale rating at 'AA+(bra)'.
--Gerdau S.A. 8.875% perpetual notes at 'BBB-';
--Gerdau Holdings Inc. 7.00% notes at 'BBB-';
--GTL Trade Finance Inc. 7.250% notes at 'BBB-'.

Fitch has also assigned IDRs to the issuers of Gerdau's guaranteed debt, as follows:

Guaranteed Debt Issuers
--Gerdau Holdings Inc. Foreign currency LT IDR at 'BBB-';
--GTL Trade Finance Inc. Foreign currency LT IDR at 'BBB-'.

The Rating Outlook is Stable.

Gerdau's investment grade ratings are supported by the company's swift response to curtail operations and manage costs during last year's global downturn, while maintaining a strong balance sheet position through the bottom of the industry cycle. As a result of plunging EBITDA generation, the company reached a peak total debt-to-EBITDA ratio of 3.8 times (x) in 2009, and 2.5x on a net basis. In just six months, these ratios were reduced to 2.6x and 1.8x, respectively, consistent with historical leverage ratio levels. For the last five years the company's net-debt to EBITDA ratio has averaged 1.8x.

Further supporting the ratings is Gerdau's strategy of maintaining a strong liquidity position through troughs in the cycle. At year-end 2009, the company held BRL4.8 billion (US$2.7 billion) of cash and marketable securities, falling slightly to BRL4.3 billion (US$2.4 billion) at June 30, 2010. Gerdau also has a pre-approved credit line at its disposal with BNDES available for BRL1.5 billion (US$844 million) for the purpose of investment programs at its Brazilian subsidiaries. In addition, the company has two other credit lines at its U.S. subsidiaries totaling around US$750 million which expire in May 2011 and December 2012, respectively.

On Aug. 30, 2010, Gerdau received approval from the Ontario Superior Court of Justice to acquire the remaining 33.7% of shares of Gerdau Ameristeel, increasing its ownership to 100% at a total cost of US$1.6 billion. This transaction will be funded by a combination of US$900 million of cash and a US$700 million bridge loan. The bridge loan is expected to be paid down with cash at the end of September. Fitch calculates that the company's net debt will increase from the June 30, 2010 level of US$5.8 billion to US$7.4 billion, and its cash and marketable securities will decrease to around US$800 million from US$2.4 billion, once this transaction has closed. The pro forma cash position is expected to increase to over US$1 billion by the first half of 2011.

The transaction will solidify Gerdau's position in North America and, in Fitch's view, completely align the interests of both companies. Post-transaction, Fitch calculates the company's pro forma total debt-to-EBITDA ratio at 2.8x, and 2.4x on a net basis, consistent with previous Fitch expectations. This ratio is expected to decrease to around 1.7x by 2012. In addition, Gerdau's pro forma liquidity ratios remain comfortable for the rating category with the ratio for cash-to-short-term debt at 1.2x, cash + funds from operations (FFO) to short-term debt at 4.5x, and cash + cash flow from operations (CFFO) to short-term debt 3.6x, as calculated by Fitch. Gerdau's refinancing risk is considered low as of June 30, 2010, with the short-term debt to total-debt ratio at just 0.1x. The company has BRL4.1 billion of maturities due by 2013, which Fitch believes is manageable.

Gerdau demonstrated healthy cash generation for 2009 and the first half of 2010, despite difficult market conditions. As a result of aggressive working capital control and scaling down of capital expenditure, Gerdau's free cash flow (FCF) position was BRL4.6 billion (US$2.3 billion) in 2009, while the company exhibited negative FCF from 2006 to 2008 as a result of large investment projects and acquisitions during a period of growth.

FFO and CFFO generation also remained healthy in 2009 at BRL2.9 billion (US$1.4 billion) and BRL6.4 billion (US$3.2 billion), respectively, as a result of these cost control measures. The large CFFO generation at the end of last year was mainly attributable to a working capital inflow of BRL3.5 billion following aggressive cost controls being implemented in 2009.

For the last 12 months (LTM) ended June 30, 2010, Gerdau's EBITDA grew to BRL5.7 billion from BRL3.8 billion at year-end 2009 with EBITDA margins recovering to 20% from 14.5% over the same period. Fitch expects the company's EBITDA to recover to approximately BRL5.5 billion to BRL5.8 billion by year-end 2010. This strong recovery reflects Gerdau's significantly increased sales volumes along with modest price increases, especially in its domestic market of Brazil where demand remains strong.

The company shipped 4.4 million metric tons of steel in the second quarter of 2010, a 30% improvement on the second quarter of 2009, while net revenues increased by 30% over the same period to BRL8.3 billion (US$4.6 billion) from BRL6.4 billion (US$3.6 billion). On a standalone basis, shipments from Brazil increased 38% over this period, with most of the demand derived from its domestic market.

In the last quarter of 2009, Brazil accounted for 67% of Gerdau's EBITDA generation, and decreased to 51% in second quarter 2010 as other markets began to recover. Brazil's economy has rebounded swiftly from the downturn, with large infrastructure projects in place for the next few years, such as the Olympics and World Cup. Fitch expects the country to exhibit GDP growth of up to 7% in 2010.

Gerdau's consolidated debt position as of June 30, 2010 was USD8.2 billion with a weighted average cost of debt of 6.3% per annum and average life of seven years, of which 75% is denominated in USD and 20% in BRL. Fitch projects the company's total debt to EBITDA to be around 2.6x-2.7x and net debt to EBITDA around 2.3x-2.5x for 2010, with both of these ratios decreasing to around 2.2x and 1.7x, respectively, by 2012.

Gerdau has a low cost structure and is vertically integrated with plans to further invest in its iron ore resources to increase self-sufficiency. Gerdau's iron ore mines have 1.8 billion tons of iron ore resources available. In addition, the company has a coking coal mill and coking coal reserves in Colombia. The company is also planning to invest in flat steel production facilities, and is targeting the end of 2012 or early 2013 for its first flat steel production. This project is currently in the advanced stages of research and has an estimated cost of around US$1 billion, to be partially financed by BNDES, with a planned annual output capacity of 1 million metric tons.

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. Any additional material debt increases would pressure the ratings at their current level.

In addition, a change in management strategy with regard to large debt-funded acquisitions could also negatively impact Gerdau's credit profile, as would a significant erosion in its liquidity position. Factors leading to a consideration of a Positive Outlook or upgrade include improving on its pre-crisis 'normalized' credit profile, as well as optimizing and improving its competitive position globally.

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

Related Research:
--'Corporate Rating Methodology' (August 13, 2010).

Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

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