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Global Credit Research - 09 Nov 2010
Approximately $875 million of Rated Debt Securities Affected
Sao Paulo, November 09, 2010 -- Moody's Investors Service confirmed the B1 ratings of Marfrig Alimentos
S.A.'s ("Marfrig"). The rating
outlook is stable. This rating action concludes the review process
that was initiated on 16 June 2010 when Moody's placed Marfrig's
ratings under review for possible downgrade.
The rating confirmation is based on the conclusion of the acquisition
of Keystone Foods, LLC and the determination that the mandatory
convertible debentures that were issued to finance the acquisition have
been deemed to have full equity treatment. The confirmation also
reflects our view that the combined entity will have an enhanced business
profile through a diversified product portfolio and improved international
distribution capabilities. While the profit margin of the combined
entity may be lower the stability of the business should be enhanced with
Ratings confirmed with a stable outlook:
Issuer: Marfrig Overseas Limited and guaranteed by Marfrig:
- USD 500 million 9.500% senior unsecured guaranteed
notes due 2020: B1 (foreign currency)
- USD 375 million 9.625% senior unsecured guaranteed
notes due 2016: B1 (foreign currency)
- Corporate Family Rating: B1 (Global scale)
Moody's had placed Marfrig's ratings on review for possible
downgrade on 16 June 2010 following its agreement to acquire 100%
of Keystone Foods LLC's (Keystone) stock for a total of USD 1.26
billion. Moody's has reviewed the details of the transaction
and considered that the 5-year mandatory convertible BRL 2.5
billion debenture used to finance this acquisition should be treated as
100% equity, in accordance with "Moody's Revised
Update on Rating Debt Obligations with Variable Promises" (published
in July 14, 2010). BNDES Participações S.A.
"BNDESPar" was the sole subscriber to the issuance.
BNDESPar (A3 -- Long Term Issuer Rating -- Domestic Currency)
is the equity investment arm of the national development bank of Brazil
and owned 13.8% of Marfrig prior to this transaction.
BNDESPar's ownership in Marfrig might increase to 35% when
the debentures convert to equity in 2015. The Keystone transaction
closed on Oct. 1st. 2010.
Moody's rating action considers the potential synergies that could
arise due to the larger scale and global distribution capabilities of
the combined company. Keystone has a number of distribution facilities
in Asia and the Middle East which will give Marfrig an excellent platform
to increase its sales in these fast growing emerging markets. Keystone
is a global supplier to McDonald's (A3 / Prime-2 -
Ratings Under Review for possible upgrade) and with the acquisition of
Keystone, Marfrig's relationship as a global supplier to McDonald's
will further strengthen. "This high percentage of sales to
McDonald's does represent concentration risk although mitigated
by the length of this relationship and the growth opportunities that this
offers Marfrig in fast growing emerging markets" said VP --
Senior Analyst Ricardo Kovacs. The operating margins of Keystone
are lower and interest expenses will increase due to the cost of financing
of the acquisition. As a result, we expect certain credit
metrics such as EBITDA margin and interest coverage to decrease in the
short term before synergy gains from the transaction take effect.
Although low, operating margins at Keystone have been historically
more stable and cash from operations have been positive.
The rating action recognizes the challenges that Marfrig will face in
order to successfully integrate Keystone into its global business.
The purchase of Keystone follows the purchase of Seara Alimentos S.A's
in January 2010. Harmonizing the operations of three large and
diverse companies will entail operational risks and integration challenges,
including the management of much broader global business.
Despite the latest suspension of purchase of industrialized Brazilian
meat by the US, the longer-term prospects for the segment
continue to be firm as Brazil is one of the lowest cost-producer
of beef in the world. Now, higher domestic cattle prices
are squeezing operating margins in the beef sector. Further strategic
consolidation should lead to improved economies of scale where a large
player as Marfrig would benefit.
The stable outlook reflects our view that going forward Marfrig will concentrate
on consolidating the acquired businesses and larger assets under management.
The outlook also reflects our expectation that the company will move towards
positive free cash flow towards the end of 2011. Achieving synergies
and transforming them into enhanced operational metrics would be a positive
rating driver. We expect the EBITDA margin and interest coverage
ratios to decrease in the near term before increasing in the latter parts
of 2011 and beyond. Since we are considering the mandatory convertible
debentures of BRL 2.5 billion as equity and not debt, leverage
is likely to decline moderately (Marfrig will assume approximately USD
450 million in outstanding debt).
Evidence of continued improving operating performance and positive cash
generation essentially at its Brazilian operations and an improvement
of its liquidity situation, would be positive for Marfrig's ratings.
Quantitatively, upward pressure on the ratings could come from a
Debt / EBITDA ratio of below 4.0 times, EBITDA margin above
12% and CFO / Net Debt of 20%, as well as ability
to generate free cash flow / Net Debt of 2%, on a sustainable
On the other hand, Debt / EBITDA of above 6.0x, EBITA
/ Interest expense of 1.0x or less and RCF / Net Debt below 10%
on a sustained basis could trigger a downgrade. Furthermore,
failure to achieve positive free cash flow by the end of 2011 could also
put downward pressure on the current rating.
For more information on Marfrig, refer to Moody's credit opinion
Moody's last rating action on Marfrig was on 16 June 2010, when
Moody's placed Marfrig's B1 foreign currency rating under review
for possible downgrade.
The principal methodology used in rating Marfrig was that for Moody's
Global Food — Protein and Agriculture Industry (published in September
2009) and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Marfrig, headquartered in São Paulo, Brazil,
is one of the leading food groups globally with beef, poultry,
pork and lamb processing plants in 22 countries, including Brazil,
Argentina, Uruguay, Chile, England, Northern Ireland,
France, The Netherlands and USA. Marfrig processes,
packages and delivers fresh, chilled and processed beef, chicken,
pork and lamb products to customers in Brazil and abroad, with approximately
45% of its global sales derived from exports. Along with
its beef products, the company also operates a wholesale food distribution
business which delivers additional food products that it imports or acquires
in the local market. Marfrig reported net consolidated revenues
of BRL 11.7 billion over the last twelve months ended 30 June 2010
(USD 6.6 billion converted by the average exchange rate).
Keystone Foods, LLC, founded in 1973, is headquartered
in West Conshohocken, Pennsylvania, United States and is a
worldwide supplier and distributor of protein products including beef,
chicken and fish. It is a premier supplier for quick service restaurants
(QSR) such as McDonald´s, Subway and Chipotle. Globally,
the company serves more than 28,000 restaurants and has 27 distribution
centers in 11 countries across the USA, Europe, Asia and the
Middle East. The company also operates 13 protein plants in seven
countries globally. Approximately 60% and 40% of
revenues come from distribution and protein respectively while Europe
and USA account for 40% of the company's total sales each.
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's America Latina Ltda.
MOODY'S CONFIRMS B1 RATING OF MARFRIG; OUTLOOK STABLE
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
No Related Data.
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