Fitch Assigns ‘BBB-’ Rating to Usiminas’ Notes Due 2018

Fitch Ratings has assigned a ‘BBB-’ rating to the proposed issuance of up to US$400 million of notes due 2018 to be issued by Usiminas Commercial Ltd., a wholly owned special purpose finance company of Brazilian steel producer Usinas Siderurgicas de Minas Gerais S.A. – Usiminas (Usiminas). The notes will be unconditionally and irrevocably, jointly and severally guaranteed by Usiminas and Companhia Siderurgica Paulista – Cosipa (Cosipa), Usiminas’ wholly owned operating subsidiary. The guarantee will rank pare passu with other unsecured and unsubordinated obligations of Usiminas and Coispa. The proceeds from the issuance will be used primarily to fund Usiminas’ capital expenditure program.

Usiminas’ foreign and local currency Issuer Default Ratings (IDRs) are ‘BBB-’ and the company’s national scale rating is ‘AA+(bra)’. The Rating Outlook is Stable.

Fitch also maintains a ‘BBB-’ rating for Usiminas’ existing US$500 million Global Medium-Term Note Program established in 2004. The issuances under this program are also unconditionally and irrevocably, jointly and severally guaranteed by Usiminas and Cosipa.

Usiminas’ ratings are supported by the company’s competitive industry position and strong financial profile. Usiminas ranks as one of Latin America’s largest low-cost integrated steel producers and enjoys dominant market shares in subsectors of the Brazilian market. The company benefits from its modern production facilities, diverse product mix and access to low-cost labor. These factors allow Usiminas to generate positive cash flows during troughs in the global steel cycle and economic downturns in Brazil. Although Usiminas focuses primarily on the domestic market, the company also maintains a presence outside of Brazil by exporting about 20%-30% of its sales volumes. The ratings also consider the concentrated nature of the Brazilian steel industry, which limits competition based mainly upon price. Barriers to entry include the logistical challenges of transporting steel to Brazil and within Brazil, as foreign steel producers have limited access to efficient distribution networks. As competition from foreign steel imports into Brazil is minimal, Usiminas maintains a 52% share of the flat steel market in Brazil and a 60% share of the automobile and autoparts sub-sectors.

Usiminas’ leverage is currently low for the rating category and appropriate for the current high steel price environment and significant budgeted capital expenditures program for the next few years. Due to strong demand in 2007, net revenues per ton are approximately 13% higher than in 2006, without considering the positive effects of the appreciation of the Brazilian real against the U.S. dollar. In the last twelve months ending Sept. 30, 2007, Usiminas generated operating EBITDA on a consolidated basis of US$2.3 billion (BRL4.7 billion) compared with US$2.0 billion (BRL4.2 billion) in 2006. As of Sept. 30, 2007 and Usiminas had total debt of US$1.3 billion (BRL2.5 billion) and cash and marketable securities of US$1.7 billion (BRL3.1 billion), resulting in a total debt-to-operating EBITDA ratio of 0.6 times (x) and a net debt-to-operating EBITDA ratio of negative 0.2x.

The company has been making significant investments to modernize its steel production facilities and continues to expand production capacity. Proposed investments of approximately US$7.0 billion (BRL14 billion) in 2008-2012 aim to increase production capacity to 12.7 million tons by 2012 from 9.0 million tons currently and to provide a higher-value added product mix. Such investments are expected to be funded primarily with debt such that the level of total debt is forecasted to increase to approximately US$4.4 billion (BRL9.0 billion) in 2009. At the peak of the investment cycle in 2009 and 2010, Fitch expects Usiminas to maintain a total debt-to-operating EBITDA ratio of close to 2.0x. Expected cash balances of about US$1.8 billion (BRL3.5 billion) at year-end 2007 will also likely be used to fund investments such that Fitch expects Usiminas to maintain a net debt-to-operating EBITDA ratio of less 2.0x. After the capacity from the expansion project comes on line in 2011, Usiminas’ total debt-to-operating EBITDA ratio is expected to decrease to close to 1.5x, a level consistent with the rating category.

Usiminas’ competitive business position, export revenues and strong liquidity allow the company to be rated on a foreign currency basis at the ‘BBB-’ country ceiling of Brazil. Usiminas’ investment grade credit profile is supported by the company’s healthy liquidity in the form cash and marketable securities in Brazil and outside of the country, strong free cash flow generation and ownership of investments such as a 14.25% stake Ternium S.A. with a market value of approximately US$1.2 billion. In addition to consolidated cash balances of US$1.7 billion, Usiminas’ liquidity during the expansion period will be bolstered by a BRL900 million revolving credit line. The company also benefits from a US$300 million committed liquidity facility available until July 2010 without material adverse change clauses for drawdowns. The offshore sources of liquidity could provide cash to make foreign currency denominated debt service payments and thereby mitigate the transfer and convertibility risk associated with a sovereign crisis in Brazil.

Usiminas owns 100% of Cosipa, which together with other subsidiaries comprise the Usiminas System. With crude steel production of 8.8 million tons in 2006, the Usiminas System ranks as the largest flat steel producer in Brazil. The system’s two primary integrated steelworks produces slabs, heavy plates and hot- and cold-rolled products, as well as galvanized steel for the automobile, construction and household appliance industries, among others. In 2006, the Usiminas System sold 7.9 million tons of finished steel products, 33% of which were directed to export markets. Usiminas is controlled by a shareholder group, comprised mainly of Brazilian and Japanese industrial and financial entities, that currently owns 63.9% of its total ordinary shares.

A full copy of Fitch’s Credit Analysis report about Usiminas can be found at FitchResearch, Fitch’s subscription-based web site, located at www.fitchratings.com or by contacting Products & Services at +1-212-908-0800.

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