Gerdau 1Q26: North America Carries Earnings, but Valuation Limits Upside
Strong liquidity and improving credit metrics support Neutral, while Brazil import pressure and tight spreads cap risk reward
We maintain our Neutral recommendation on Gerdau’s bonds. We continue to view the company as one of the cleaner BBB LatAm industrial credits, supported by conservative leverage, strong liquidity, and a structurally advantaged North American business. 1Q26 reinforced that view, with adjusted EBITDA increasing 23.2% YoY to R$2.96 billion, gross leverage improving to 1.45x, and FFO to total debt increasing to 53.3%. However, the curve already reflects much of this credit quality. At current levels, Gerdau’s belly screens rich versus the EM BBB curve, while the long end appears closer to fair value. This keeps us Neutral rather than more constructive, as the stronger credit profile is already largely reflected in spreads.
The key point for bondholders is that Gerdau’s credit story remains solid, but the valuation case for adding risk is limited. The GGBRBZ 5.750% 2035 notes trade around 103 bps OAS, priced at $102.6, with 6.9 years of duration and a 5.4% YTW. We view the 2035s as the best holding point on the curve because they offer the cleanest balance between carry, duration, liquidity, and credit quality, while providing direct exposure to Gerdau’s resilient North American earnings base. However, we do not view the notes as a compelling add at current levels. The notes trade visibly through the EM BBB curve at their duration, and the spread differential versus the EM BBB index is now close to flat compared with a one year average premium of around 17 bps. In our view, this reinforces the conclusion that valuation already captures much of Gerdau’s credit strength. We would become more constructive closer to 120 bps OAS, which would place the 2035s back near the EM BBB curve and represent a more defensible entry point for a Brazil corporate credit, even one with Gerdau’s stronger balance sheet and differentiated U.S. exposure.
