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Rating Action:

Moody's assigns Ba3 rating to JBS's proposed notes; stable outlook

23 Jul 2019

New York, July 23, 2019 -- Moody's Investors Service ("Moody's") assigned a Ba3 rating to the proposed senior unsecured notes to be issued by JBS Investments II GmbH ("JBS") and fully guaranteed by JBS S.A. Net proceeds will be used primarily for liability management purposes, addressing shorter maturity and secured debt instruments, mostly represented by trade finance lines with Brazilian banks. As a result, the transaction will not have a material effect on JBS's leverage and will result in a more comfortable maturity profile, with lower liquidity risk. The outlook is stable.

The rating of the notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and assume that these agreements are legally valid, binding and enforceable.

Rating action:

Issuer: JBS Investments II GmbH

Proposed $500 million gtd senior unsecured notes: Ba3

RATINGS RATIONALE

JBS's Ba3 ratings reflect the initiatives taken in 2018-19 aiming at reducing the amount of debt levels through 2021, which have enhanced the company's liquidity profile. Accordingly, the company has taken the necessary steps to address refinancing risk by negotiating, in May 2018, an aggregate amount of BRL 12.2 billion in short term debt instruments with banks under the so-called "normalization agreement". In September 2018, JBS pre-paid BRL2 billion of the 2019 and 2020 amortizations under this agreement. Subsequently, in 2Q2019, the company pre-paid BRL5.1 billion, and, in July 2019, the company paid an additional BRL750.7 million under this agreement, which results in a remaining amount due of BRL5.7 billion ($1.5 billion).

JBS liability management initiatives further included the issuance, in October 2018, of $500 million notes due 2026 primarily to fund part of the $1.5 billion tender offers for the 2020 ($1 billion) and 2021 ($488 million) notes, the renewal of $900 million revolving credit facilities in the US, and a new AUD$200 million committed line in Australia. In April 2019, JBS issued $500 million as an add-on to the 2026 notes issued in October 2018, and an additional $1 billion in notes due 2029 under JBS USA Lux S.A., JBS USA Finance, Inc and JBS USA Food Company, together with add-ons in the total amount of $700 million under the same entities. The amounts raised were used to amortize the 2022 term loan under JBS USA Lux S.A. In May 2019, JBS USA Lux S.A. raised $1.9 billion in a new term loan due 2026.

JBS's Ba3 ratings continue to be supported by the strength of its global operations as the world's largest protein producer and its substantial diversification across protein segments, geographies and markets. JBS' strategy to increase its global footprint into value-added processed food segments improved its business profile and will lead to stable or higher operating margin and cash flow over time.

The ratings are constrained by the inherent volatility of the protein industry, which is subject to risk factors such as weather conditions, diseases, supply imbalances, and global trade tensions, along with the company's history of aggressive growth via acquisitions.

The ratings also incorporate the risks regarding a series of judicial processes and investigations which can directly or indirectly involve JBS and its shareholders. Still, the investigations regarding the Cooperation Agreements or Leniency Agreement have not prevented the company, nor J&F, from executing asset sales or renegotiating debt with banks.

The stable outlook reflects the expectation that JBS will maintain a prudent approach to liquidity and continue to generate positive free cash flow, while maintaining strong operating performance. The outlook also incorporates our expectation that the evolution of existing judicial processes and investigations will not jeopardize JBS liquidity or the company's access to capital markets.

An upgrade of JBS' ratings will require further reduction in event risks, represented by existing litigations, including the maintenance of the J&F Investimentos (J&F) Leniency Agreement. An upgrade would also require additional improvements in the company´s capital structure, most specifically the reduction of its debt maturities in 2021 and 2022, while maintaining an adequate cash balance to meet the requirements of its operations and debt obligations. The ability to growth inorganically without jeopardizing liquidity or leverage is another important consideration for an upgrade. Quantitatively, an upgrade would require JBS adjusted total debt to EBITDA to remain below 3.5x and the cash flow from operations (CFO)/net debt ratio to be above 20%.

The ratings or outlook could suffer negative pressure should events that can increase liquidity risk occur, or if JBS' operations deteriorate, weakening cash flows as such CFO/net debt remains below 15% on a sustained basis. A negative action could be prompted by persistently high leverage, with total debt to EBITDA above 4.2x and weakening interest coverage, with EBITA/interest expense maintained below 2x.

The principal methodology used in this rating was Protein and Agriculture published in May 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in São Paulo, Brazil, JBS S.A. (JBS) is the world's largest protein producer in terms of revenues, slaughter capacity and production. The company is the leader in beef, chicken and leather, and the second largest pork producer in the US. The company has a presence in over 100 countries, with large scale and diversification. In the last twelve months ended March 2019, JBS S.A. reported consolidated revenues of BRL 186 billion ($49.2 billion), with reported EBITDA margin of 8.2%.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Barbara Mattos, CFA
Senior Vice President
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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