Fitch Places Gerdau on Rating Watch Negative Following Acquisition Announcement

Business Wire, Nov 19, 2007

NEW YORK -- Fitch Ratings has placed the following ratings of Gerdau S.A. (Gerdau) and related issuances on Rating Watch Negative:

--Foreign currency Issuer Default Rating (IDR) 'BBB-';

--Local currency IDR 'BBB-';

--National scale rating 'AA (bra)';

--US$600 million 8.875% guaranteed perpetual notes 'BBB-';

--US$1.0 billion 7.25% guaranteed bonds due 2017 'BBB-'.

The placement of the ratings on Negative Watch follows the announcement today by Gerdau that it has reached a definitive agreement with the Quanex Corporation to acquire MACSTEEL, a long specialty steel producer in the United States for approximately US$1.7 billion in cash, including assumed debt and other liabilities of approximately US$170 million. The transaction follows Gerdau's global growth strategy to diversify its offerings and include higher value-added steel products and strengthens its position as a supplier of special bar quality steel for the North American automotive industry.

The Negative Watch reflects concern that Gerdau will most likely fund this acquisition with a combination of cash and debt, and no equity. Absent significantly higher steel prices in the near term, this acquisition would increase the company's leverage and further weaken its ability to reduce leverage from the levels reached recently after acquiring Chaparral Steel Company (Chaparral). As a result, leverage ratios could be pushed beyond the levels acceptable for the rating category.

The company recently incurred nearly US$5.0 billion in incremental net debt as a result of the acquisition of structural steel producer Chaparral. As an industry leader in the Americas, Gerdau is likely to continue to drive regional consolidation activity, which heightens event risk. At Sept. 30, 2007, Gerdau had approximately US$9.0 billion of total debt and US$2.8 billion of cash and marketable securities. Gerdau's consolidated pro forma EBITDA for 2007 is estimated to be approximately US$3.5 billion, resulting in a net debt to pro forma EBITDA ratio of about 2.3 times (x).

Headquartered in Porto Alegre, Brazil, Gerdau is a holding company for the group's steel production facilities in North and Latin America, Europe and Asia. The Gerdau companies operate mini-mill and integrated-steel facilities in 13 countries including Brazil, Argentina, Chile, Colombia, Dominican Republic, India, Mexico, Peru, Uruguay, Venezuela, the United States, Canada, and Spain and have a crude steel production capacity of 23.2 million metric tons in 2007. Gerdau owns 89.3% of its Brazilian operating companies, which consist primarily of Acominas and Acos Longos and have a combined production capacity of about 9.8 million tons of crude steel. In North America, Gerdau owns 66.5% of Ameristeel, which ranks as the region's second-largest mini-mill long steel producer with an annual manufacturing capacity of more than 9.9 million metric tons of crude steel from a network of 19 mini-mills, including the 50%-owned Gallatin Steel joint-venture.

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