Fitch upgrades JBS
by Meat&Poultry staff
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NEW YORK – JBS SA's (JBS) foreign and local currency Issuer Default Ratings (IDR) and senior unsecured notes have been upgraded by Fitch Ratings to 'BB' from 'BB-'. Fitch also affirmed and withdrew the IDRs of JBS Finance II Ltd. and JBS USA Finance Inc. Both are special purpose companies, and Fitch no longer considers their ratings to be relevant to the agency's coverage.
Fitch relays this upgrade reflects JBS' improved business profile following its successful integration of Seara Brazil (Seara), whose well-branded and less volatile operation has enhanced JBS' business portfolio. The upgrade also reflects the company's strong products and geographical diversification, as well as the successful integration of several businesses over the past few years, according to a news release. Fitch expects the company to report strong performance in all of its divisions in 2014 and 2015. JBS' ratings are tempered by its acquisition appetite for growth.
JBS' ratings are supported by its strong business profile as the world's largest beef and leather producer. JBS became the second-largest producer of processed meats in Brazil with its acquisition of Seara from Marfrig Alimentos SA (Marfrig) in 2013. The company's product and geographic diversification help mitigate risks related to disease and trade restrictions, Fitch said.
Due to its low cost structure, potential productivity gains and revenue growth momentum derived from strong international demand, the fundamentals of the Brazilian beef industry remain positive. Plus, in July 2014 China lifted its embargo of Brazilian beef, which will benefit exports.
However, this positive trend is somewhat offset by high cattle prices, the slowdown of the Brazilian economy and an abundant cattle herd that is reaching peak levels. This could pressure EBITDA margin of the main players in the industry during 2015, Fitch said. Meanwhile, the US beef industry remains difficult due to the shortage of the cattle herd, but the shutdown of industry capacity is gradually improving companies' profitability.
As a result, Fitch expects JBS' net debt-to-EBITDA ratio to organically fall to below 3.0x by the end of 2014 due to its strong EBITDA improvement and positive FCF generation. Given the acquisitive nature of the company, Fitch has built in an expectation of debt-financed acquisitions that could potentially increase the company's leverage ratio. Nevertheless, JBS' leverage should remain in line with the 'BB' rating category.
JBS has reported strong sales and EBITDA growth during 2Q'14. Its net revenues increased by 32.1 percent to BRL29 billion, and its EBITDA increased by 45.9 percent versus 2Q'13. The company's strong performance is due to an improvement in revenues from all business units, except for the US chicken operations (Pilgrim's Pride), which remained stable. The Seara acquisition also contributed to growth. Fitch expects the recent decline of commodity prices, notably corn price to be supportive to the group's overall profitability in 2015.
Considering JBS' acquisitions history, Fitch believes the company will continue to pursue growth opportunities to strengthen its business profile. The group made a failed attempt to buy Hillshire Brands through an initial bid at US$6.4 billion in May 2014. Subsequently, JBS announced the acquisition of Tyson Foods Inc.'s poultry businesses in Brazil (US$175million) and Mexico (US$400 million) and assets of Ceu Azul in Brazil (BRL246 million). Some of these acquisitions are depending upon the final approval from CADE, the Brazilian antitrust authority.
A downgrade could be precipitated by an increase in JBS' net leverage ratio above 4x-4.5x on a sustained basis due to a sharp contraction of its operating margins, negative FCF generation, and/or a significant debt-funded acquisitions. However, an upgrade could result from the company's consistent positive FCF generation and resilience of its operating margins backed by business diversification leading to its net leverage ratio falling towards or below 2.5x on a sustained basis.