Form 20-F - Gerdau

million in foreign currency. Of total long-term debt, $ 155.4 million represents debentures, of which $ 77.2 million
denominated in U.S. dollars and $ 78.2 million in reais.
Of the $1,691.4 million of loans denominated in foreign currency, approximately 46.0% were contracted by
the Company and its Brazilian subsidiaries and 54.0% by the Company’s foreign subsidiaries.
Information about the terms of long-term debt cost is presented in Note 14 to the Financial Statements –
‘Long-term debt and debentures’. For additional information, see Item 11 - Quantitative and qualitative disclosures
about market risks.
In January 1999, the Company assumed $ 130.0 million of debt relating to the Eurobonds issued by
Metalúrgica Gerdau maturing on May 26, 2004 that were partially redeemed on May 26, 1999 and fully retired at
maturity in May 2004.
The Company is subject to limitations on debt levels, the granting of encumbrances on its properties and the
payment of dividends under certain circumstances, in accordance with the terms of its debentures, its loans from the
Banco Nacional de Desenvolvimento Econômico e Social - BNDES (“BNDES”), and the refinancing agreement for
Gerdau Ameristeel.
With the exception of the 13 th debenture issue, the terms of the Company’s public debentures prohibit the
payment of dividends in excess of 30% of net profit, if such distributions cause the Company’s long-term liabilities to
exceed its net worth by a factor of more than 50% and its current assets to fall below its current liabilities.
The 13 th debenture issue limits the Company’s consolidated financial debt to no more than four times
Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA of the last twelve months, defined as gross
profit minus general, sales and administrative expenses plus depreciation and amortization). This instrument also
requires consolidated EBITDA to be more than double net interest expenses for the last twelve months, excluding
monetary and foreign exchange variations.
The terms of the Company’s BNDES debt require that the current liquidity ratio (consisting of current assets
divided by current liabilities) is least 1.3 and that financial debt divided by Earnings before Interest, Taxes,
Depreciation and Amortization (EBITDA defined as gross profit minus general, sales and marketing and
administrative expenses plus depreciation and amortization) is less than 5. These agreements also contain negative
covenants, subject to customary exceptions.
The Gerdau Ameristeel Senior Secured Credit Facility contains restrictive covenants that limit the
Company’s ability to engage in specified types of transactions without the consent of the lenders. Limitations apply to
incurring additional debt, issuing redeemable stock and preferred stock, paying dividends on its common shares,
selling or otherwise disposing of certain assets and entering into mergers or consolidations. The indenture governing
the Senior Notes permits Gerdau Ameristeel and its restricted subsidiaries to incur additional indebtedness, including
secured indebtedness, subject to certain limitations.
The Company agrees to furnish a copy of the debt instruments described herein to the Securities and
Exchange Commission upon request.
All covenants described above are based on (i) the financial statements prepared according to Brazilian
Corporate Law for the operations contracted by the companies in Brazil and (ii) financial statements prepared in
accordance with U.S. GAAP for Gerdau Ameristeel. As of December 31, 2003, management believes that the
Company was in full compliance regarding such debt covenants and other conditions of the debt described above.
In order to protect itself from fluctuations in the Brazilian currency against the U.S. dollar and changes in
interest rates on its foreign currency debt incurred in Brazil, Gerdau entered into cross-currency interest rate swaps
through which it receives U.S. dollars, generally accruing interest at fixed rates, and pays Brazilian reais accruing
interest at rates based on the CDI (Brazilian Interbank deposit rates). As of December 2003, the total amount swapped
was $ 555.3 million (notional amount) of which $ 95.6 million has been treated, pursuant to EITF No. 02-02 on a
combined basis as if the loans had been originally denominated in reais. Part of the Company’s cash flow from
operations is denominated in Brazilian reais and part in U.S. dollars. See Note 20 to the financial statements –
Derivatives Instruments. Such cash flows from operations may be utilized to service this debt. There can, however,
be no assurance that cash flows from operations will be sufficient to service foreign currency debt obligations,
denominated principally in U.S. dollars. It is thus possible that exchange rate fluctuations may have a material
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