Closing of initial stage of US$500 million securitization for Brazilian steel manufacturers

On September 5, Hunton & Williams announced the closing of the initial stage of a $500 million export receivables securitization program for the Brazilian steel manufacturer Gerdau S.A. and its subsidiary, Aço Minas Gerais S.A. - Açominas. The transaction will provide Gerdau and Açominas with greater access to international capital markets at a lower cost because its structure reduces both currency exchange risk and Brazilian country risk for the investors, according to Hunton & Williams attorney Allen D. Moreland, who advised both Gerdau and Açominas.

JP Morgan Securities served as placement agent in the $105 million initial tranche, which allows Gerdau and Açominas customers to purchase steel by paying to a US trust account. The notes issued in the transaction are repaid with funds deposited by customers in the trust account. ?This structure has two major advantages,? said Mr. Moreland. ?First, the export receivables are dollar denominated, so there is no currency mismatch between the collateral and the notes issued, and second, collections on the dollar-denominated receivables never enter Latin America, thereby reducing any Brazilian country risk associated with a debt moratorium or a balance of payments problem.?

The structure of the securitization allowed the notes to receive a Fitch investment grade rating of ?BBB-? and to ?pierce the sovereign ceiling? ? that is, receive a rating higher than Brazil?s less-than investment grade ?B? rating. ?A country?s sovereign rating usually acts as a cap on the rating assigned to the international debt obligations of a company located within the country, no matter how good the company?s corporate credit is rated locally,? added Mr. Moreland, whose practice includes advising issuers, underwriters and financial institutions on international capital market transactions.

Gerdau and Açominas are developing the joint export receivables securitization program to enhance their debt profiles. Gerdau is the Brazilian operating company of The Gerdau Group, the largest producer of long steel in the Americas, with mills in Brazil, Argentina, Canada, the United States and Uruguay. Currently, Gerdau has an installed capacity of 14.4 million metric tons of steel per year. Gerdau?s US steel operations are owned through Tampa-based Gerdau Ameristeel.

Gerdau and Açominas were advised by Hunton & Williams, through partner Allen D Moreland, and associates Rafael Prohias, Victor Casagrande and Alexandra Aguirre. Ulhôa Canto, Rezende e Guerra Advogados gave them Brazilian counsel, through partner Guilherme Murgel de Rezende, associates Ricardo Laureano Siqueira and Daniel Soares, and trainee Fernanda Lessa.

The investors took US counsel from Shearman & Sterling, through partner Stuart Fleischmann and associate Harold Allen.

Maples and Calder gave Cayman Islands counsel on the deal, through partner Graham Lockington and associate Dale Crowley.

Brazilian counsel to the investors was given by Pinheiro Neto Advogados through partner José Carlos Meirelles and associate Enrico Jucá Bentivegna