Gerdau Renegotiates Loan Covenants

Brazilian steelmaker Gerdau has renegotiated leverage covenants on $3.7bn worth of bank loans, according to Monday filing with the CVM. The change will cost Gerdau between $20m-$60m, it says. The outlay will presumably go towards paying amendment fees and higher margins on the facilities to reflect increased risk to banks. Gerdau was heard to have paid banks an amendment fee of 25bp. Two of its recent dollar facilities were launched last year paying 125bp and 150bp. The covenant renegotiation involved more than 40 banks, says Gerdau. A recent drop in economic activity has hurt the steel sector, which analysts and executives say was already long overdue for a cyclical downturn following years of rising prices. Gerdau’s leverage covenants now state net debt to Ebitda must be below 5.0x, compared to a previous gross debt to Ebitda ratio of under 4.0x. It now must also have a Ebitda to net interest expense ratio higher than 2.5x, compared to the previous Ebitda to interest expense ratio floor of 3.0x. Finally, maximum consolidated gross debt must not exceed $11.0bn. Gerdau says it expects its revenues to stabilize by 2010, which will allow the company to reestablish its prior loan covenants.