Fitch Rates CSN's Proposed Sr. Unsecured Notes 'BBB-'

CHICAGO-(Business Wire)-September 2, 2009 - Fitch Ratings has assigned a 'BBB-' long-term foreign currency rating to Companhia Siderurgica Nacional's (CSN) proposed 10-year note issuance through its subsidiary CSN Islands XI Corp. Proceeds of this issuance, which could be up to US$750 million, will be used to refinance short-term debt and for general corporate purposes.

Fitch affirmed CSN's local currency and long-term Issuer Default Ratings (IDRs) of 'BBB-' as well as the company's national scale rating of 'AA(bra)' on May 21, 2009. The Rating Outlook for all the ratings is Stable.

Solid Liquidity Position, No Medium-term Amortization Pressure but Leverage Ratios Rising: CSN's large cash balance is a key credit consideration during this period of weak demand for steel globally and the uncertainty of the strength and timing of a recovery. As of June 30, 2009, the company held cash and marketable securities of approximately BRL6 billion (US$3.1 billion). This strong liquidity position is a result of the divestment of 40% of NAMISA to Big Jump Energy Participacoes, a Japanese-Korean consortium, which increased cash by BRL$7.3 billion (US$3.1 billion) in December 2008. CSN's total debt stood at BRL11 billion (US$5.6 billion) at the end of June 2009 and had an average maturity of 9.1 years. For the last twelve months (LTM) to June 30, 2009, CSN's Fitch-calculated total debt/EBITDA ratio increased to 2.3 times (x) and net debt/EBITDA to 1.0x compared to 2.2x and 0.8x in FY08, respectively. LTM Funds from Operations (FFO) declined by 86% to BRL807 million (US$388 million) from BRL5.6 billion (US$3 billion) in 2008 as a result of the unprecedented deterioration in operating conditions during the first half of this year. However, CSN benefits from the financial flexibility afforded by its current liquidity position, which is enough to pay all principal debt amounts due until 2015.

Second Quarter Results Shows Signs of Improvement, Steel Recovery Concerns Remain: Tax incentives on automotive and household goods initiated by the Brazilian government as part of a package of fiscal stimulus measures started to take affect in the second-quarter 2009 (2Q'09). Activity in the construction sector also increased following the government's investment program in affordable housing. The 'My House, My Life' initiative, which was launched in April 2009, aims to build one million properties in Brazil for people earning low wages. These positive end-user developments in CSN's domestic market led to a 47% increase in the company's flat steel sales volumes during the second quarter. Declining prices, however, resulted in revenues climbing by only 2% to BRL2.5 billion (US$1.3 billion) during the second quarter. Second quarter EBITDA increased by 7% to BRL728 million (US$373 million) from the prior quarter. The EBITDA margin for the most recent quarter was 29%, one percentage point higher than during the first quarter but a 19 percentage point decline from the EBITDA margins achieved one year earlier. Fitch remains cautious on the scope of recovery in real steel demand following news that blast furnaces which were previously idled are to start-up again, which could once more lead to oversupply.

Casa de Pedra Mine Output Increasing as Planned, FCF continues to be Negative as a Result: Further diversifying the company's product mix, CSN also produces iron ore mainly from its Casa de Pedra mine, which has a current production capacity of about 21 million tons per year. Iron ore production totaled 6.7 million tons in the second quarter, a new company record. Export sales accounted for 3.3 million tons. Mining net revenue accounted for 15% of the consolidated total in the second quarter. This percentage will climb in the future due to CSN's plan to increase its iron ore output to 90 million tons by the end of 2013 (including NAMISA). As a result of owning a large iron ore asset with high iron content, CSN is able to produce quality slabs at prices amongst the lowest in the world. FY08 net income of just under BRL5.8 billion (US$3.2 billion) was almost double FY07's net income of BRL2.9 billion (US$1.5 billion). Fitch-calculated Free cash flow (FCF) reported for FY08 was negative BRL223 million (US$124 million), compared to a positive FY07 position of BRL627 million (US$322 million). The negative FCF in FY08 is attributable to the large capital expenditure relating to CSN's iron ore expansion project. FCF continues to be negative in 2Q'09 due to capital expenditures of BRL501 million (US$257 million), 80% of which continued to be related to the expansion of the Casa de Pedra mine and related Port of Itaguai along with maintenance, repairs, technological improvements and other works. Fitch expects to see a return to consistent positive FCF generation after 2011.

Long-term Credit Concerns: The Brazilian iron ore and steel market is very profitable. At this time it appears the dynamics are not changing. However, foreign steel producers are expected to increase their investments in Brazil in the future. While these plants will likely be built to export steel slabs, the presence of other steel companies in Brazil would raise further uncertainty in the industry. In addition, iron ore exports are heavily dependant on China, which is disproportionately the largest producer of steel in the world. An imbalance between supply and demand for steel in China could lead to a situation where either the country exports a large amount of its steel globally, or decreases production, which in turn, would affect demand for iron ore.

Potential Rating or Outlook Drivers: 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 CSN's medium-term capital structure. In addition, a change in management strategy with regards to conservative capital expenditure during the crisis or debt-funded acquisitions could also negatively impact CSN's credit profile, as would a significant erosion of liquidity position prior to a sustainable economic recovery. Large uses of cash for dividend payments or share buybacks at the current time would also be viewed negatively. Factors leading to a consideration of a Positive Outlook or upgrade include successfully maintaining a conservative capital structure throughout the downturn and improving on its pre-crisis 'normalized' credit profile, as well as emerging from the crisis with an optimized and improved competitive position globally.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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