The Long and Short
The market waits for progress on CSN refinancing
This material is a Marketing Communication and does not constitute Independent Investment Research.
CSN reported total EBITDA of R$3.325 billion for the fourth quarter of 2025, about flat against the corresponding period last year and better than market expectations as iron ore sales outperformed. CMIM accounted for about 52% of total earnings, which is close to the quarterly average for the year. Steel was about 21% of earnings, meaningfully better than the average of 17% in 2025, and adding to the outperformance with the steel business posting a 13% increase in year-over-year earnings. While iron ore sales volumes declined 3% sequentially, the typical fourth quarter seasonality impact was less than expected. CSN burned about R$280 million in cash in the period atop a R$2 billion capex deployment, with working capital cash generation providing a R$350 million offset. Net debt increased on the cash burn, prepayments and foreign exchange, taking net leverage from 3.14x to 3.47x, though some of this impact has already corrected in the current quarter.
Bond price performance and general credit sentiment remains largely correlated with the ongoing plans to issue a secured loan to mitigate refinancing pressure. The plans is still to issue a collateralized structure at the holding company level, with Morgan Stanley directing traffic amongst the lender group. The expected size of the facility has initially been up to $1.5 billion, though given the current market conditions, I anticipate the end result will be in the $1.2 billion to $1.3 billion range, priced off of SOFR in the 550 to 600 bp range. The 5-year loan will, likely be secured by a pledge of shares from the cement subsidiary and the facility is expected to contain waterfall features (for priority payments) as well as step-up features to compensate holders if the cement business takes longer than planned to divest. In addition to the cement business collateral, we understand that around $400mn of additional assets from the international steel business will be added to the collateral package to entice participation. If we use a 7.5x multiple on the cement LTM EBITDA and add the incremental collateral, our initial LTV calculation is approximately 55%, on a $1.3 billion loan amount. Initial use of proceeds would presumably address existing bank debt maturities as well as the remaining 2026 bond amortization ($182 million) together with a likely tender for a portion of the $1.3 billion 2028 bond.
A successful issuance of the loan provides needed liquidity to the cap structure though obviously primes existing bond holders in front of a complicated series of execution challenges with plans to monetize a minority percentage of the infrastructure assets scheduled in tandem with the cement divestment. Broadly, spinning out the cement assets for around ~7.5x would imply (pre-tax) a deleveraging potential of up to 0.5x on a net basis. Spinning out the infrastructure assets could enable a further few clicks of deleveraging.
As the bond market well knows, CSN has a history of telling the credit market what it wants to hear, which initially generates enthusiasm in bond pricing but has often been followed by slow or no execution or an amendment to the initial plan. This time around, CSN has become an unintended member of the Brazilian high beta club following the operating volatility of Braskem, the governance issues at Ambipar and the collapse at Raizen – the culmination of which has once again led CSN yields into solid double-digit territory. The 28s, at an $83-dollar price, offer value in front of an expected deal announcement in the near term. The curve has steepened as initial concerns were about priming; however this has morphed into concerns about liquidity and now we expect that executing a successful transaction will drive gains in the 2030s and 2032s, despite the structural subordination, on lower overall refinancing risk, with the incremental convexity benefit from the lower dollar-priced longer duration bonds.
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