S&P Rates MRS Logistica S.A.'s Notes 'B'; Outlk Stable

Business Wire, July 25, 1997

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 7/25/97 -- Standard & Poor's today has assigned its single-'B' rating to MRS Logmstica S.A.'s (MRS) US$150 million series A notes due 2005 and its US$170 million series B notes due 2005. The foreign and local currency corporate credit rating of MRS is double-'B'-minus.

The issue rating reflects de facto subordination of the unsecured noteholders to the Brazilian government-owned railway system, which owns substantially all operational assets and leases them to MRS. The local and foreign currency outlook is stable.

The rating incorporates MRS' position as the sole provider of rail transportation service, under a 30 year concession, for several world-class iron ore mines in the State of Minas Gerais in Brazil; completed plus expected progress in improving operational efficiencies; and MRS' ownership by several major customers. Volumes transported are expected to be relatively stable, with about 70% of tonnage consisting of iron ore, of which about 65% (33% of total tonnage) is destined for export. Prices for iron ore exports shipped via MRS are set as percentage of the export price of iron ore denominated in U.S. dollars. These positive factors are somewhat offset by inherent uncertainties in any privatization as to the ultimate timing of revenue and cost improvements, along with a significant debt burden.

Railroad operations consist of the exclusive operation of four principal rail lines covering about 1,674 kilometers. The largest section is 1,545 kilometers between Belo Horizonte, Rio de Janeiro and Sao Paulo, encompassing a mining region northeast of Rio de Janeiro. The track passes through Brazil's industrial heartland, which accounted for about 65% of Brazil's total GDP. The vast majority of revenues and volumes are generated by transporting iron ore from mines owned by the major shareholders to either port facilities or steel plants. Ineffective rail operation under government ownership resulted in declines in volumes transported but no significant loss of market share; instead, the ore producers were forced to underproduce demand. In the past five months since privatization, improved managerial decisions have begun increasing volumes transported. Capital improvements to overhaul equipment and recover from several years of deferred routine track maintenance are expected to further lower cycle times of trains by reducing bottlenecks caused by minor derailments and equipment failures.

The financial profile is highly leveraged (lease-adjusted debt to capital about 89% initially), but benefits from MRS' ownership by its major customers which are highly dependent on the MRS system. Volumes transported for these customers are expected to gradually increase, reflecting existing demand. Nevertheless, EBITDA coverage of interest is expected to remain under 3 times during the next several years. Weak coverage is somewhat mitigated by an escrow account, established with approximately US$50 million of the proceeds, which should cover the first three interest payments due on the notes. This account will be maintained in Brazil and denominated in Reais, but invested in U.S. dollar indexed instruments, mitigating a possible devaluation risk on escrowed funds. Under the concession agreement, MRS shareholders are required to raise an additional R130 million in equity in 1999, either through a direct contribution or through a public equity offering. Mineracoes Brasileiras Reunidas S.A. and Companhia Siderurgica Nacional, the two largest shareholders, accounting for 63% of revenues, are heavily dependent upon rail transportation provided by MRS and therefore have strong economic incentives to support its continued operation. Finally, two-thirds of the price of the concession has been financed by the Brazilian Federal government over a 30 year tenor through the Concession and Lease Agreements.

OUTLOOK: Stable.

Further improvements in operating performance should result in a gradual strengthening of MRS' overall business and financial profile. While the ownership structure could shift over time, Standard & Poor's views the importance of MRS' transportation system to the customers as crucial. --- CreditWire

CONTACT: Robert Schulz, CFA, 212/208-1979

Kathryn Barrios, 212/208-1228