Brazilian steel company CSN took another run at the bond market on Wednesday with a US$1bn benchmark two-part bond as it looked to put a big dent in a looming maturity wall.
Proceeds are slated to pay down all of the outstanding US$547m of outstanding 2019s and part of the US$1.1bn in 2020s, a move that has pleased rating agencies.
The firm tried to carry out the same liability management exercise last year only to fall short on size after garnering just US$350m through the issuance of the 7.625% 2023s.
Investors and CEO Benjamin Steinbruch have butted heads in the past over pricing and the disappointingly small size of last year’s trade may have reflected this.
At the time, some thought the firm had missed its chance to carry out a transformational trade that would have cut debt substantially and caused its bonds to rally.
But with the debt-laden firm on a deleveraging push and broader markets working in its favor, CSN exceeded size expectations of US$750m to print a US$1bn trade.
The firm launched a US$400m tap of its 7.625% 2023s at 7.25%, inside initial price thoughts of 7.375% area. That is nicely above the 6.8% level seen on the bond at Tuesday’s close, according to MarketAxess data.
It also launched a new seven-year non-call three at 7.875%, stopping short of coming at the tight end of guidance of 7.875% (+/-12.5bp).
Over the last year the company has been attending to its amortization humps and trying to bolster liquidity by negotiating bank debt and selling assets.
“Steinbruch said (in the past) that he would sell assets and never did because he didn’t like the price,” said a banker.
“They were close to the cliff edge in terms of leverage, but now it is a better market backdrop and the company is doing the right things.”
Fitch removed its rating watch negative on the company’s B- rating after the deal was announced, while S&P placed its CCC+ rating on watch positive.
An expected recovery in steel demand, higher iron ore prices, and a recent US$500m supply contract with Swiss trading and mining company Glencore also stands CSN in good stead.
“If the company is able to refinance the majority of its notes due 2019 and 2020 …and announces any of these additional liquidity events, CSN would achieve a material gross debt reduction,” Moody’s said.
Fitch now expects net leverage to drop below 5x this year, but that could go below 4x should an iron streaming transaction and the sale of German assets go through.
“We did not expect such a sharp improvement, with the recent bank refinancing and the upcoming cash inflow providing ample resources to manage the scheduled maturities in 2019 and 2020,” Cedric Rimaud, an analyst at Gimme Credit, wrote in a recent report.
Still languishing near the bottom of the ratings spectrum, CSN is seen as a company with some upside and one of those credits that investors have been watching closely.
Not only are 7% yields relatively rare in the Brazilian corporate complex, but the bond could offer substantial capital gains if management continues on the current path.
“People are looking for names that can reprice and rally several points,” said the banker. “It is still triple C so it has a lot of room for upgrades and they seem to be finally doing something they have resisted for a while.”
