Fitch Rates Marfrig's Proposed USD600MM Senior Note Issuance 'B/RR4'

Business Wire

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a rating of 'B/RR4' on Rating Watch Negative to Marfrig Holdings (Europe) B.V.'s (Marfrig) proposed approximately USD600 million senior notes issuance due 2021. The notes are unconditionally and irrevocably guaranteed by Marfrig Alimentos S.A. and Marfrig Overseas Limited, currently rated at the same level. Proceeds are expected to be used to refinance debt maturities and extend debt maturity schedule. A complete list of Fitch's ratings of Marfrig follows at the end of this release.

Marfrig's ratings take into consideration the company's aggressive capital structure combined with a challenging operational environment. The company's operations are exposed to the volatility of protein prices and profit margins due to factors beyond the company's control. Positive considerations include Marfrig's strong business position as one of the largest producers and exporters of beef and with prominent positions in the poultry and pork industries worldwide.

KEY RATING DRIVERS

Rating Watch Status

Marfrig's ratings were placed on Ratings Watch Negative in June of 2013, reflecting negative free cash flow and higher leverage, and prior to the announced sale of assets to JBS S.A. Shortly thereafter, Marfrig announced the sale certain of Seara assets to JBS S.A. (JBS) for the assumption of BRL5.85 billion (USD2.9 billion) of Marfrig's bank debt with maturities between 2013 and 2017; the transaction is subject to the approval of CADE, the Brazilian antitrust authority.

The asset sale is positive for Marfrig Alimento S.A.'s (Marfrig) and it is likely that the closing of the transaction would result in the stabilization of Marfrig's ratings at the 'B' category and the removal of its ratings from Rating Watch Negative. Pro forma for the sale, Marfrig's net debt-to-EBITDA ratio should decline to about 3.5x from its current level of 5.1x as of June 30, 2013. While Marfrig will have lower leverage, it would also have significantly less product diversification in Brazil. As a result, Marfrig's exposure to more volatile protein business would increase.

Marfrig purchased Seara from Cargill in 2009 for USD900 million. Marfrig had more than tripled Seara's business, from USD1.7 billion in revenues and USD76 million of EBITDA in 2009 to about USD4.5 billion in revenue and estimated pro forma EBITDA of USD300 million in 2012. The addition of some assets from BRF S.A. (BRF) in the middle of 2012 was also important to this growth, as it more than doubled Seara's production capacity.

Significant Leverage Decline Post Asset Sale

As of June 30, 2013 LTM, Marfrig's total debt reached BRL11.2 billion; including BRL3 billion of Seara's debt that should be transferred to JBS, as a result of the asset sales. Disregarding this amount, pro forma net debt-to-EBITDA was 3.4x, a significant improvement from 4.9x reported in 2012.

Concerns regarding leverage remain, as the company has the challenge to improve its cash flow generation in order to keep leverage in line with the 'B' category. Marfrig's ability to maintain a sustainable capital structure will depend on its ability to start generating positive free cash flow, which in turn hinges upon the company's success in executing its strategy to realign business priorities, reduce costs, improve logistics, and establish itself as a viable niche player in the segments it operates.

Operating Results Remain Challenged

Marfrig operating results remain challenged. As of June 30, 2013 LTM, consolidated net revenues declined to BRL21.5 billion, from BRL23.7 billion, in 2012, as a result of the disposal of Seara and Zenda's assets in June 2013. The remaining businesses presented increasing revenues in the second quarter. However, despite the increasing revenues of the remaining business, the EBITDA of these operations during the second quarter of the year was negatively impacted by the pricing environment of the beef segment in Brazil, Argentina and Uruguay. The beef business represents about 38% of Marfrig's net revenues.

The high cost of cattle in the region, coupled with the challenges to push higher beef prices through to the consumer, resulted in a decline of Marfrig's beef EBITDA to BRL145 million in the 2Q2013, compared with BRL225 million in the 2Q2012. In additional to the revenue and EBITDA contraction, cash flow generation has been pressured by higher working capital needs. As of June 30, 2013 LTM, cash flow from operation (CFFO) was negative at BRL280 million, impacted by BRL1.1 billion of working capital needs. These results combined with capex of BRL747 billion, resulted in negative FCF of BRL1 billion during the period. Marfrig's negative FCF over the last year has resulted in continued high leverage on its balance sheet.

Business Portfolio Will Change

While Marfrig's divestiture will lower leverage, the transaction will somewhat reduce the company's diversification. Marfrig's remaining business portfolio includes strong brands and performers such as Key Stone, Moy Park in the UK and its Brazilian beef business. The company acquired some of those assets in a series of acquisitions that resulted in both product and geographic diversification which is positive for the ratings but also led to highly levered capital structure. Marfrig's strategy for managing and growing its remaining businesses in a profitable fashion are key factors to the company's long-term credit quality.

RATING SENSITIVITIES

Marfrig's inability to start generating positive FCF and consequently keep leverage below 4.0x on a sustainable basis could result in a downgrade. An upgrade of Marfrig's ratings is over the medium term is plausible should the company and new management be able to overcome the several challenges facing the company on both a financial and operational level. The company's capital structure is expected to continue to be highly leveraged after asset sales.

Fitch currently rates Marfrig as follows:

Marfrig Alimentos S.A.

--Local currency Issuer Default Rating (IDR) 'B';

--Foreign currency IDR 'B';

--National scale rating 'BBB(bra)';

--BRL 300 million 3rd debentures issue (1st tranche) 'BBB(bra)';

--BRL 300 million 3rd debentures issue (2nd tranche) 'BBB(bra)'.

Marfrig Overseas Ltd

--Foreign currency IDR 'B';

--US$375 million senior unsecured notes due 2016 'B/RR4';

--US$500 million senior unsecured notes due 2020 'B/RR4'.

Marfrig Holdings (Europe) B.V.

--Foreign currency IDR 'B';

--US$600 million senior unsecured notes due 2017 'B/RR4';

--US$750 million senior unsecured notes due 2018 'B/RR4'.

The ratings are on Rating Watch Negative.

The ratings are informed by 'Fitch Parent and Subsidiary Linkage Criteria'.

Additional information is available at 'www.fitchratings.com'.

In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=801104

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