Fitch Ratings has affirmed the ratings and revised the Rating Outlooks for JBS S.A. (JBS), BRF - Brasil Foods S.A. (BRF), and Marfrig Alimentos S.A. (Marfrig) to Negative from Stable.
In addition, Fitch has affirmed Minerva S.A.'s ratings with a Stable Outlook. A full list of rating actions follows at the end of this press release.
The ratings review was prompted by the recent sharp increase in the international corn and soybean prices due to the severe drought in the U.S. which damaged the crop and lowered crop yield expectations precipitously. On their own, the severity and the extended duration of the grain price hikes were not sufficient to prompt the Outlooks revisions on BRF, JBS and Marfrig to Negative from Stable.
Grain price fluctuations are part of the normal course of business for the protein producers. In the long run the cost increases are passed through to the end consumer, sales volumes adjust, and the protein producers' profitability returns to a normal level.
The timing of the drought, however, is an issue for JBS and Marfrig as their ratings are weak in their respective categories and as they need to make progress in deleveraging to help maintain their credit quality. For BRF, the increase in corn price comes at a very inopportune time, while the company incurs temporary costs increases related to the asset transfers and the brand suspensions in relation to the CADE judgment of last year.
Prices are expected to remain at this elevated level for the rest of the year and well into 2013. The extent of the grain price effect on operational performance depends on the protein mix of the respective company. Poultry and live hog prices are directly affected by grain prices, as grains represent significant percentage of the cost of raising a live animal.
The impact will be more immediate in poultry, while in the short run, life hog prices may decline as the producers slaughter animals early to avoid higher feed cost. Cattle prices will be affected to a lesser extent. In the U.S., the high corn prices will prompt cattle ranchers to skip the feed-lot stage when corn is fed to the animals and send them directly to the slaughter houses. This acceleration of herd reduction may cause cattle availability issues in 2013. Beef in Brazil is mostly grass fed and thus remain largely unaffected by grain prices.
JBS
Approximately 30% of JBS's revenue is related to corn fed animals. The company's operating results in the first half of 2012 improved vis-a-vis last year but were slightly below Fitch's expectations. This was mostly due to the negative profitability of its U.S. beef segment which generated a negative EBITDA of USD55 million during the first semester.
The U.S. pork segment also did not perform as strongly as expected. EBITDA margins declined more than expected from 9% in 2011 to 6.5% in the first quarter and 5.8% in the second quarter. Beef Mercosul and Pilgrim's Pride (PPC) outperformed expectations in the first half of 2012.
The second half of the year and 2013 are expected to be more challenging with high corn and soybean prices reducing and reversing the ongoing recovery at PPC. The U.S. pork segment will also suffer. While JBS is not integrated in hog production, its cost of goods sold (mostly live hogs) are bound to increase.
Fitch expects that live hog prices which declined in the past 30 days will rise again as a result of the higher feed costs. In addition, cattle availability in the U.S. during 2013 will be lower, thus slowing the recovery in the U.S. beef segment. All this will prevent the company from generating free cash flow and meaningfully reducing leverage within the next 12-18 months. As of June 31, 2012, JBS's net debt to EBITDA ratio was high for the category at 4.6x.
A downgrade could be triggered by the additional weakening of the company's financial performance and leverage metrics and continued negative free cash flow (defined as cash flow from operations less capital expenditures and dividends) beyond current expectations.
Finally, any acquisitions with debt financing may also lead to a downgrade. A revision of the Outlook to Stable could be triggered by a number of factor that could include financial improvements better than expected given the current operating environment and/or capital injections to repay debt.
Marfrig
Marfrig's pace of de-leveraging in the past few quarters has been significantly below Fitch's expectations as the company struggles to achieve synergies and reach leverage targets. As of June 31, 2012, Marfrig's ratio of net debt to Adj. EBITDA (before one-time asset sales proceeds) was 4.4x, essentially unchanged from its pro forma ratio of 4.3x as of June 30, 2011. Marfrig is less reliant upon corn-fed animals than some of its peers with approximately 17% of its revenues directly related to corn fed animals. An additional 50% of its products contain chicken and pork -- domestic and international processed foods sold by Moy Park and Keystone Foods.
Marfrig will be challenged to raise prices to fully accommodate its rising costs in the context of a slow economy in Brazil and slower than expected recovery in its export markets. As a result, free cash flow will likely not be meaningful for reducing leverage this year.
The risk is exacerbated by the additional challenges that Marfrig is facing: integrating the assets acquired in an asset swap with BRF, retaining the market share of the brands it received, and the successful launch of large number of new product in a bid to capture additional market share.
While Fitch believes that the company is addressing its upcoming short-term debt maturities, liquidity is tight. Cash and marketable securities of BRL3 Billion were covering less than 1x BRL 3.2 billion of short-term debt as of June 30, 2012. Marfrig has also recently secured a credit line of BRL 350 million and has about USD300 million available under its Keystone Foods Revolver.
Rating downgrade could be precipitated by a further deterioration in company's credit metrics, negative cash flow generation or liquidity concerns. A revision of the Outlook to Stable could be triggered by a number of factors that could include financial improvements better than expected given the current operating environment and/or capital injections to repay debt.
BRF
The slow recovery of its export markets and the unanticipated magnitude of the cost related to the asset transfers to Marfrig and the launch of new products have led to concerns about the company's ability to maintain an investment grade capital structure in the near to medium term, resulting in the revision of the company's Outlook to Negative.
At the end of the second quarter of 2012, BRF's net debt to EBITDA ration reached 2.8x, significantly above expected levels. Within the context of a slow Brazilian economy and depressed export markets, BRF will be challenged to raise prices to fully accommodate its rising costs Approximately 50% of BRF's revenues are from commodity protein related to corn fed animals. An additional 45% contains pork and chicken. This may prevent the company from quickly reducing leverage to its target levels of 2.0x which is more in line w ith its current rating category.
Rating downgrade could be triggered by the continuation of the elevated transfer and marketing expenses beyond the end of 2012 coupled w ith market share erosion beyond anticipated level as a result of the brands suspensions or failure to realize the expected synergies from the merger with Sadia.
Weak cash flow generation and slow reduction of the current leverage can also lead to rating downgrades. A revision of the Outlook to Stable could be triggered by a number of factor which could include financial improvements better than expected given the current operating environment and/or capital injections to repay debt.
Minerva
Unlike JBS, Marfrig and BRF, none of Minerva's revenue is related to grains. The company delivered strong operating results in the first half of 2012. However, Minerva's leverage remained unchanged as its nominal debt grew in BRL terms since 75% of its debt is denominated in USD, and the U.S. dollar appreciated against the Brazilian real during the same period.
As of June 31, 2012, Minerva's net debt to EBITDA ratio stood at 4.2x. Fitch expects Minerva's operating results to continue to improve in 2012 and 2013. With 80% of revenue coming from grass fed beef, the company is uniquely positioned to take advantage of the positive beef cycle in Brazil and continuous strong prices domestically and for export.
Positive or negative rating changes could be triggered by one or more of the following events: Rating downgrades could be precipitated by an unexpected deterioration in company's credit metrics, negative cash flow generation or liquidity concerns. Rating upgrades could result from the company displaying better than expected financial improvements given the current operating environment and/or capital injections to repay debt.
Fitch has affirmed the following ratings:
JBS S.A.:
--Foreign currency Issuer Default Rating (IDR) at 'BB-';
--Local currency IDR at 'BB-';
--Notes due 2016 at 'BB-';
--National scale rating at 'A-(bra)'.
JBS USA LLC:
--Foreign currency IDR at 'BB-';
--Local currency IDR at 'BB-';
--Term Loan B facility due in 2018 at 'BB'.
JBS USA Finance, Inc:
--Foreign currency IDR at 'BB-';
--Local currency IDR at 'BB-'.
JBS USA jointly with JBS USA Finance:
--Notes due 2014 at 'BB-';
--Bonds due 2020 at 'BB-';
--Notes due 2021 at 'BB-'.
JBS Finance II Ltd:
--Foreign currency IDR at 'BB-';
--Local currency IDR at 'BB-';
--Notes due 2018 at 'BB-'.
The Outlook is revised to Stable from Negative.
Marfrig Alimentos S.A.
--Local currency IDR at 'B+';
--Foreign currency IDR at 'B+';
--National scale rating at 'BBB+(bra)';
--BRL 300 million 3rd debentures issue (1st tranche) at 'BBB+(bra)';
--BRL 300 million 3rd debentures issue (2nd tranche) at 'BBB+(bra)'.
Marfrig Overseas Ltd
--Foreign currency IDR at 'B+';
--US$375 million senior unsecured notes due 2016 at 'B+/RR4';
--US$500 million senior unsecured notes due 2020 at 'B+/RR4'.
Marfrig Holdings (Europe) B.V.
--Foreign currency IDR at 'B+';
--US$750 million senior unsecured notes due 2018 at 'B+/RR4';
The Outlook is revised to Stable from Negative.
BRF Brasil Foods S.A. (BRF):
--Local currency Issuer Default Rating (IDR) at 'BBB-';
--Foreign currency IDR at 'BBB-';
--Long-term national scale rating at 'AA(bra)';
--$750 million 5.875% Senior Notes due 2022 at 'BBB-';
--$750 million 7.250% senior notes due in January 28, 2020 issued by BFF International Ltd. and guaranteed by BRF and Sadia at 'BBB-';
--$250 million 6.875% bonds due in May 24, 2017 issued by Sadia Overseas Ltd. and guaranteed by BRF at 'BBB-'.
The Outlook is revised to Stable from Negative.
Minerva S.A.:
--Local currency Issuer Default Rating (IDR) at 'B+';
--Foreign currency IDR at 'B+';
--National scale rating at 'BBB(bra)';
--BRL200 million outstanding debentures due 2015 at 'BBB(bra)'.
Minerva Luxembourg:
--Local currency IDR at 'B+';
--Foreign currency IDR at 'B+';
--Senior unsecured notes due in 2017, 2019 and 2022 at 'B+/RR4'.
The Outlook is Stable.
The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
National Ratings Criteria
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Source: Argentine Beef Packers S.A.
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