Approximately USD 500 million in rated debt affected
Sao Paulo, April 26, 2011 -- Moody's has assigned a B1 foreign currency rating to the proposed USD
500 million of senior unsecured guaranteed notes to be issued by Marfrig
Holdings (Europe) B.V., a wholly owned subsidiary
of Marfrig Alimentos S.A. ("Marfrig").
The notes will be unconditionally and irrevocably guaranteed by Marfrig
and certain subsidiaries of the guarantor. At the same time,
Marfrig's existing B1 senior unsecured and corporate family ratings are
affirmed. The proceeds of this issuance will be mainly used to
refinance short term maturing debt. The outlook for the ratings
The following rating was assigned:
USD 500 million senior unsecured guaranteed notes due 2018: B1 (foreign
The following ratings were affirmed:
- Corporate family rating: B1 (Global scale)
- USD 375 million 9.625% senior unsecured guaranteed
notes due 2016: B1 (foreign currency)
- USD 500 million 9.500% senior unsecured guaranteed
notes due 2020: B1 (foreign currency)
The outlook for all ratings is stable.
Marfrig's B1 rating reflects the company's more diversified portfolio
of products and by-products in animal proteins (beef, poultry,
pork, lamb and turkey), its growing portfolio of branded value-added
products, its broader geographic footprint and competitive cost-structure.
However, the rating also incorporates Marfrig's continuous weak
cash flow from operations, relatively high leverage, and the
remaining challenges in successfully integrating the Seara acquisition
of 2009, but more critically the USD 1.26 billion Keystone
acquisition in mid-2010, as well as two strategic Chinese
joint ventures that will require ongoing investments.
The proposed USD 500 million notes issuance is part of Marfrig's
liability management as most of the funds will be used to pay short term
maturing debt and the 2018 maturity of the proposed notes falls between
the maturities of two similar bonds. The B1 rating of the proposed
notes assumes that the final transaction documents will not be materially
different from draft legal documentation reviewed by Moody's to date and
that these agreements are legally valid, binding and enforceable.
In 2010, Marfrig's net revenues increased 65% from a year
before, however, the raise was mostly due to the Seara and
Keystone acquisitions rather than organic growth. More importantly,
Marfrig's gross margin and EBITDA margin increased to 16.5%
and 11.2% in 2010 from 13.1% and 8.7%,
respectively, in 2009. The evolution in margins was led by
higher prices and higher protein demands, both domestically and
from the export markets, and were achieved despite a 6% appreciation
of the BRL against the USD. The slightly better EBITDA margins
also improved Marfrig's leverage. We expect Marfrig's
leverage (Total Debt to EBITDA) to fall back to around 4.5x thanks
to the cash flow from Seara and the benefits of acquisition synergies.
Moody's also expects Marfrig's free cash flow generation to
improve based on the gradual recovery of export markets conditions and
by the continued development of the domestic Brazilian market where per-capita
consumption should trend upward, but perhaps at a more controlled
pace due to inflationary reservations.
In 2010, the company's liquidity slightly improved due to
effective control of working capital demands and the issuance of BRL 2.5
billion (approximately USD 1.3 billion) in new mandatory convertible
debentures, but since the convertibles were mostly used for the
Keystone down-payment, Marfrig's cash position returned
to around BRL 3.9 billion (approximately USD 2.3 billion)
versus the company's BRL 3.2 billion (approximately USD 1.8
billion) in short term debt maturing in 2011. The proposed USD
500 million issuance will further lengthen Marfrig's average debt
maturity as at least 75% will be used for short-term debt
Moody's regards as positive the fact that BNDES, through its equity
arm, BNDES Participações S.A. ("BNDESpar",
rated A3 local currency rating), is a strategic shareholder in Marfrig.
BNDESpar has a track record for sustaining its equity investments and
is a source of cheap financing for local currency debt in Brazil.
The stable outlook is based on our expectation that Marfrig will remain
focused in 2011 on completing the integration of its large acquisitions
and investments in China, while maintaining adequate liquidity and
financial metrics for its rating category. We expect the company
will prudently manage its liquidity, maintaining a minimum cash
position of BRL 2.6 billion, and capital structure.
Marfrig's rating would likely come under downward pressure if the company
faces greater than expected integration or operating challenges abroad
that leads Marfrig's EBITDA margins to drop significantly below 10%
for two consecutive quarters (margin was 11.2% in 2010).
Negative pressure is also likely if Marfrig's liquidity were to deteriorate.
Quantitatively, downward pressure on Marfrig's B1 rating or outlook
is likely if Total Debt / EBITDA is sustained above 6.0x (5.7x
in 2010), EBITA to gross interest expense falls below 1.0x
(1.0x in 2010) or if Retained Cash Flow to Net Debt is below 10%
(19.5% in 2010). All credit metrics are according
to Moody's standard adjustments and definitions.
The ratings or outlook could present upgrade pressure if Marfrig is able
to improve its liquidity profile and better manage its working capital
needs to strongly enhance its cash flow from operations on a sustained
basis. An upgrade would also require evidence that the company's
integration with Seara and Keystone, as well as its latest investments
in China, are on track and free cash flow will be positive on a
sustained basis. Quantitatively, an upgrade would require
CFO/ Net Debt approaching 20% (1.2% in 2010) and
Total Debt / EBITDA of near 4.0x (5.7x in 2010).
Finally, Marfrig's ability to consistently maintain EBITDA margins
above 5% during a down cycle in the global industry would be also
positive for the ratings.
The principal methodology used in rating Marfrig was that for Moody's
Global Food — Protein and Agriculture Industry (published in September
Marfrig, headquartered in São Paulo, Brazil,
is one of the largest animal protein processing companies in Brazil.
With 151 processing plants operating in 22 countries, including
Brazil, Argentina, Uruguay, Chile, England,
Northern Ireland, France, the Netherlands, and the USA.
Marfrig processes, prepares packages and delivers fresh, chilled
and processed beef, pork, chicken, lamb as well as leather
products to customers in Brazil and abroad, with approximately 40%
of its 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.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information and confidential and proprietary Moody's Investors
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on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
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Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
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 assigns B1 rating to Marfrig's USD 500 million proposed notes, stable outlook
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