Fitch revises outlook on Brazilian food cos.
NEW YORK – Surging prices for corn and soybeans prompted Fitch Ratings to affirm and revise the rating outlooks for JBS S.A., Brasil Foods S.A. and Marfrig Alimentos S.A. and Minerva S.A. Fitch revised the rating outlooks for JBS, Brasil Foods and Marfrig to negative from stable, while Minerva's ratings received a stable outlook.
The ratings agency said drought conditions that damaged the US corn crop and lowered crop yields has caused sharp increases in international corn and soybean prices at a time when JBS, Marfrig and Brasil Foods have weak ratings.
"On their own, the severity and the extended duration of the grain price hikes were not sufficient to prompt the Outlooks revisions on [Brasil Foods], JBS and Marfrig to negative from stable," according to Fitch. "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," Fitch continued. "For [Brasil Foods], 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."
Approximately 30 percent of JBS's revenue is related to corn-fed animals. 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 US during 2013 will be lower, thus slowing the recovery in the US beef segment. All this will prevent the company from generating free cash flow and meaningfully reducing leverage within the next 12-18 months.
Fitch said factors that could trigger a downgrade include additional weakening of the company's financial performance and continued negative free cash flow beyond current expectations.
Fitch said 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 in 2012. Marfrig is also facing additional challenges in integrating the assets acquired in an asset swap with Brasil Foods, retaining the market share of the brands it received, and the successful launch of large number of new products in a bid to capture additional market share.
Fitch said it believes Marfrig is addressing its upcoming short-term debt maturities, however liquidity is tight. A further deterioration in company's credit metrics, negative cash flow generation or liquidity concerns could trigger a ratings downgrade, the agency said.
Brasil Foods is challenged by the slow recovery of the company's export markets, the cost related to the asset transfers to Marfrig and the launch of new products, Fitch said. These factors have led to concerns about the company's ability to maintain an investment grade capital structure in the near to medium term.
Factors that could trigger a rating downgrade include the continuation of high transfer and marketing expenses beyond the end of 2012 in addition to market share erosion beyond anticipated levels on brand suspensions or failure to realize the expected synergies from the company's merger with Sadia. Also, weak cash flow generation and slow reduction of the current leverage can lead to rating downgrades, Fitch said.
Fitch forecasted Minerva's operating results to continue to improve in 2012 and 2013. Minerva's revenues are unrelated to grains because 80 percent of its revenues come from grass fed beef. Therefore, Minerva is uniquely positioned to take advantage of the positive beef cycle in Brazil and continuous strong prices domestically and for export, Fitch said.
Fitch affirmed Minerva S.A.'s ratings with a stable outlook. Fitch forecasted Minerva's operating results to continue to improve in 2012 and 2013. Minerva's revenues are unrelated to grains because 80 percent of its revenues come from grass fed beef. Therefore, Minerva is uniquely positioned to take advantage of the positive beef cycle in Brazil and continuous strong prices domestically and for export, Fitch said.