Fitch Ratings Upgrades MRS Logistica's Ratings

Business Wire, June 11, 2004

Business Editors

CHICAGO--(BUSINESS WIRE)--June 11, 2004

Fitch Ratings has upgraded its local currency rating of MRS Logistica (MRS) to 'BB' from 'BB-'. Fitch has also upgraded the company's national scale rating that applies to its first debenture issue to 'A-(bra)' from 'BBB (bra)' and the national scale rating that applies to its second debenture issue to 'A(bra)' from 'A-(bra)'. Fitch has affirmed MRS's 'B ' foreign currency rating. The foreign currency rating of MRS applies to the series A and series B notes due 2005 issued by MRS in 1997. The foreign currency rating is constrained by the Federative of Brazil's 'B ' foreign currency rating. The Rating Outlook for all the ratings is Stable.

The rating action reflects MRS's improved financial performance. After many years of negative free cash flow, MRS generated positive free cash flow in 2003 of about BRL500 million despite its large fixed-payment burden. Due to greater cargo volumes, higher average tariffs and operational improvements, MRS's EBITDAR, which is defined as EBITDA plus MRS's concession and lease payments, increased 28% to BRL709 million in 2003 from BRL556 million in 2002. As a result of expected higher cargo volumes to be transported in 2004, MRS should generate EBITDAR of about BRL800 million. In 2003, EBITDAR covered fixed expenses, defined as interest expense plus concession and lease payments, by 2.6 times (x), an improvement from 2.1x in 2002 and from slightly more than 1.0x during prior years.

The ratings for MRS continue to reflect the company's position as the sole provider of railway transportation services for its major customers and limited competitive threats. An ownership structure composed of industry-leading companies with strong credit profiles, along with MRS's improved financial performance, further supports the ratings. The local currency and national scale ratings are constrained by the company's leveraged capital structure resulting from the large fixed payment of approximately BRL160 million per year to the Brazilian government under its railway concession and lease agreements.

Companhia Siderurgica Nacional (CSN), one of the leading integrated steel producers in Latin America, is MRS's largest shareholder with a 32.2% stake in MRS total equity. CSN is rated 'BBB-' by Fitch Ratings on a local currency basis. MRS's next-most important shareholder is Brazil's second-largest iron ore producer, Mineracoes Brasileiras Reunidas (MBR). MBR owns 31.6% of MRS's equity and in turn, is indirectly owned by Companhia Vale do Rio Doce (CVRD). CVRD, located in Brazil, is the world's largest iron ore producer and exporter and has significant interests in Brazil's railway sector. CVRD's secured debt is rated 'BBB' by Fitch. Both MBR's and CSN's operations are entirely dependent upon the ability of MRS to transport iron ore (which MBR mines and exports and CSN mines and uses to produce steel). As a result, the 'BB' local currency rating of MRS is strongly supported by the ability and willingness of its captive shareholder customers to inject capital into the company as needed.

This support was explicitly demonstrated in 1998 when the shareholders of MRS established a tariff model to determine annual per-ton delivery prices for captive customers. Under this tariff agreement all costs incurred by MRS are passed on to its captive customers, and a targeted return on equity was established. In 2003, the average tariff was BRL15.6 per ton, or about 30% higher than in 2002. Although the tariffs for captive customers are typically set annually, operating costs are reviewed by board members and MRS management on a quarterly basis. If MRS's costs are lower or higher than a predetermined limit due to changes in the exchange rate or fuel costs, the tariff rate for captive customers can be adjusted at that time. MRS can also be reimbursed retroactively for costs incurred. For example, in the last quarter of 2002, MRS recorded additional revenues of BRL184 million from captive customers for foreign-exchange losses that occurred in 1999 and 2001.

Over the last several years, total volumes transported by MRS have steadily increased to 86 million tons in 2003 from 52 million tons in 1998 due to the capacity and port expansion efforts of some of MRS's customers, such as MBR and CVRD (formally Ferteco). An increase to 95 million tons is forecasted for 2004. MRS continues to remain well poised for growth as a result of CSN's mine expansion. In 2004, CSN will begin to expand the production capacity of its Casa de Pedra iron ore mine to 40 million metric tons from 14 million tons. The expansion is expected to be completed by mid-2006. MRS is planning to invest about US$100 million over the 2005-2006 period to purchase about 60 locomotives and 2000 wagons to support the CSN mine expansion. Such expansion efforts by MRS's shareholders increase their dependence on the railway, and as a consequence, the strategic importance of MRS to its shareholders.

Excluding BRL1.2 billion for the capitalization of MRS's future concession and lease payments, a large portion of the company's debt obligations of BRL801 million as of year-end 2003 consists of reais-denominated debentures (2nd issuance) totaling BRL328 million (under a BRL450 million local debenture program established in 2001). This issuance is secured by a partial pledge of future receivables from MRS's three main captive customers, MBR, CSN and CVRD. The transaction benefits from a collection trust that requires a minimum balance of BRL19.0 million in receivables. In August 2000, MRS also issued debentures of BRL100 million (1st issuance) which were redeemed in August 2002 to be held in treasury by the company. U.S. dollar obligations consist primarily of US$101 million (about BRL292 million) of the company's series A and B notes due in 2005.