Steelmakers brace against the slump

Published: 10 November 2008

Brazil firms up position in steel production

Today's challenging economic conditions have had a dramatic impact on the global manufacturing, construction and shipping industries. The result has been a global steel slump. But while the steel industry faces some difficult months ahead, the slump has created the conditions for consolidation and investment, with many governments priming the pumps with massive infrastructure projects and demand still projected to rise in the longer term.

Brazil, South America's largest steel producer, has responded to the slump by cutting output. But with its natural resources, infrastructure and expertise in steel production, Brazilian steelmakers have not lost sight of the future. Careful management of production and cross-border consolidation should ensure Brazil will be well equipped for the resumption of demand once economic activity picks up.

HSBC has played a significant role in helping Brazilian steel companies harness this situation to bolster their international position in the industry.

Buying into the US market

One such breakthrough transaction was the USD4.3 billion financing package to help local conglomerate Gerdau Group acquire US-based Chaparral Steel. Displaying an understanding of market dynamics amid the credit crunch in 2007, HSBC secured the total financing package at competitive rates, in its capacity as bookrunner and adviser.

The deal was the biggest financial transaction of 2007 in Brazil, and the biggest ever acquisition for the Gerdau Group. In this deal, its Gerdau Ameristeel Corporation, with Gerdau SA acting as guarantor, received a USD2.75 billion term loan and a USD1.5 billion bridge loan. The deal set a benchmark for similar transactions and re-opened the bank loan market for other Latin American issuers.

The Gerdau Group is an international steel producer with operations in the US, Canada, Chile, Argentina, Uruguay and Colombia. Gerdau is the leading producer in the Americas of long steel, which is used in applications ranging from wires and railways to the structural steel used in building construction.

Texas-based Chaparral Steel produces about 2.5 million tonnes of structural steel and steel bar products annually, and its sales are mainly in North America.

The deal demonstrated the Group's expertise in handling acquisition finance packages in Latin America, and reinforced HSBC's position as a leading house in the international syndicated loan and bond markets.

Katia Bouazza, Managing Director, and Head of Debt Capital Markets for Latin America, said the deal showed that positive results can be achieved in negative conditions.

"When all markets were shut down, Gerdau managed to pull successful financing for the acquisition of Chaparral, despite the global credit crunch that started in August 2007," said Ms Bouazza.

"HSBC took the bold step of re-engineering the deal and shifting the counterparty risk directly to the Brazilian parent, Gerdau SA, permitting the issuer to execute the deal at considerably lower financing margins. The quality of execution in difficult markets attests to HSBC's top-notch capital market capabilities in the region."

Complex cross-border transactions

In another recent transaction, HSBC acted as sole financial adviser to Votorantim Metais when it acquired a 27 per cent stake in AcerBrag SA, Argentina's second largest non-flat steel producer. Votorantim followed up its December 2007 investment with further investments and within the next six months it had a 52.9 per cent stake in the company.

This was a milestone deal for the company and its parent Votorantim Group; a Brazilian conglomerate with USD13 billion in revenues, and a mining and metals portfolio that lacked steel production capacity.

AcerBrag produces 250,000 tonnes of long steel annually, accounting for 14 per cent of Argentina's steel production and generating revenues of USD130 million. The acquisition made Votorantim a major player in the long steel market in Argentina.

Raúl Girini, Co-Head of Investment Banking in HSBC Argentina and head of the deal team handling the acquisition, said the deal reinforced HSBC's status in South America as a leading adviser in mergers and acquisitions and in the metals and mining sector. It also demonstrated the Group's skills in complex cross-border transactions.

"What was interesting about this deal was the way it joined up not two but three countries – Argentina, Brazil and the UK," said Mr Girini.

"When Votorantim started to express an interest in expanding its steel business unit, the initial research for identifying a target acquisition was done in Britain, where HSBC has a strong metals and mining team. The UK team went to Brazil to discuss potential acquisitions. Up to that point, Votorantim had no presence in Argentina."

AcerBrag had already been targeted by a leading Brazilian steel producer, which had been trying to acquire the smaller firm for two years, said Mr Girini.

"At first, AcerBrag was sceptical. It didn't think Votorantim had a chance against its well-established rival. But it helped that HSBC already had a good relationship with AcerBrag in Argentina. That opened the door for going ahead with the deal."

In addition to helping Votorantim's cross-border expansion, the deal showed how HSBC's investment banking and corporate banking teams can consolidate financing between emerging markets, Mr Girini said. "The acquisition was very much a joining-up exercise for all parties concerned. HSBC brought together its London-based metals and mining experts and its on-the-ground teams in Brazil and Argentina to make it happen."