Fitch Rates JBS' 2023 Notes Reopening 'BB-' & Affirms Ratings; Outlook to
NEW YORK -- April 8, 2013
JBS S.A. (JBS) wholly owned subsidiary ESAL GmbH (ESAL) has announced the
reopening of its USD500 million senior unsecured notes due 2023, which will
carry the same rating as the original deal of 'BB-', according to Fitch
The proceeds from the current offering are expected to be used to refinance
shorter maturity indebtedness and for general corporate purposes. These notes
are unconditionally guaranteed by JBS and JBS Hungary Holdings Kft.
Concurrently, Fitch has affirmed JBS's ratings and revised its Ratings Outlook
to Stable from Negative. A complete list of ratings follows at the end of this
KEY RATING DRIVERS
The 'BB-' rating takes into consideration JBS's strong business profile, as
the world's largest beef, leather and pork producer and one of the largest
producers of chicken and lamb. Further factored into JBS' ratings are the
company's geographic and product diversity, which partially mitigates the
risks of trade barriers and animal diseases. JBS has high leverage and its
risk profile is above average due to cyclical risks associated with the meat
business and the company's aggressive attitude toward growth through
The revision of the Ratings Outlook was prompted by improving business outlook
for JBS in 2013, particularly at its chicken division in the U.S., Pilgrim's
Pride (PPC). Fitch notes positively the tangible reduction in leverage
achieved by JBS in the second half of 2012, mainly due to the turnaround in
its US beef operations. While cattle availability continues to be an issue in
certain parts of the US, the division is expected to remain profitable in
2013, albeit at a reduced levels. More importantly, price increases in chicken
cuts in the US in the latter part of 2012 suggest that the industry as a whole
has responded faster than expected to reduce volumes in response to elevated
grain prices. As a result, Fitch now anticipates that this division will show
stronger than expected profitability in 2013.
Leverage Reduction through Improving Operations
Fitch considers net debt-to-operating EBITDA in the 3.0x range to be the
normalized leverage ratio for the 'BB-' rating category for companies in the
protein industry, which face volatile and cyclical operating earnings. As of
Dec. 31, 2012, JBS' net leverage ratio stood at 3.4x, and Fitch expects this
ratio to decline to about 3.0x by the end of 2013. Generating positive free
cash flow (FCF) within the next 12 - 18 months remains the largest challenge
for the company. Main concerns in 2013 are cattle availability and oversupply
of pork in the U.S. Possible grain price shocks could also pressure costs and
profitability, which would hurt the company's ability to deleverage.
JBS' operating profit and cash flow improved in the second half of 2012. Cash
Flow from operations (CFFO) improved to BRL1.5 billion in 2012, as compared to
BRL607 million in 2011. Negative FCF of BRL147 million during 2012 continued
to reflect high capital expenditures of BRL1.6 billion. Net revenues have been
on an upward trend in the past five years, fueled by acquisitions and capital
investments. EBITDA margins remain between 4% and 7%, which is typical for the
industry. In 2012, net revenues of BRL75.7 billion and EBITDA of BRL4.4
billion resulted in an EBITDA margin of 5.8%.
Adequate Liquidity, Reliance on External Financing
JBS has an adequate liquidity position and a manageable 2013 debt maturity
schedule, both of which will be improved with the current offering. As of Dec.
31, 2012, cash and marketable securities of BRL5.4 billion covered short-term
debt of BRL6.1 billion by 0.9x. As a mitigating factor, about 65% of
short-term debt corresponds to trade finance lines that support export
activity. The company also needs to maintain about 10% of EBITDA to support
its working capital, which was about BRL440 million in 2012. Considering these
two adjustments, short-term maturities of long-term debt were covered more
than 2.0x by available cash. In addition, the company's JBS USA division has
about USD 750.8 million available under its senior secured credit facility and
PPC has about USD 572.7 million available under a separate facility.
JBS's maturity schedule for 2014 is heavy with close to BRL4 billion of debt
coming due. Fitch projects that JBS's FCF generation will be neutral to
slightly positive in 2013, which will continue to make the company dependent
upon external financing to address its 2014 maturities.
Solid Business Profile
JBS' credit ratings are supported by a strong business position in the world
production of beef, lamb, chicken and pork. The company benefits from
geographic and product diversity, which mitigate risks related to disease, the
imposition of sanitary restrictions by governments, market concentrations, as
well as tariffs or quotas applied regionally by some importing blocs or
countries. JBS has plants in 12 Brazilian states and is the most
geographically diversified player within this industry in Brazil, as it has
operations in the U.S., Canada, Mexico, Argentina, Paraguay, Uruguay, Italy,
and Australia. The company is domiciled in Brazil and has a significant
footprint in the U.S., with about 66% of its revenues coming from that region,
per Fitch's estimates.
Above-Average Industry Risk and Acquisition Profile
The protein industry is volatile and exposed to fluctuations in commodity
prices by nature. The company's aggressive attitude toward growth through
acquisitions amplifies that risk. While its business profile benefits from
improved diversification through past acquisitions, the risk of additional
The credit benefits from the implicit support of the Brazilian development
bank's investment arm (BNDESPar), which directly and indirectly holds 23%
after it transferred 10.1% in December 2012. The founding family indirectly
controls 44% of JBS's shares. The company's ability to finance part of its
expansion with equity benefited its capital structure, avoiding peaks in
A ratings upgrade could be triggered by a number of factors that include
financial improvements significantly above Fitch's expectations, shift of
corporate strategy away from acquisition fueled growth and into cash flow
generation, and/or sufficient capital injections to meaningfully reduce debt.
Rating upgrade is unlikely in the short to medium term.
A downgrade could be precipitated by weakening of the company's financial
performance and leverage metrics. Continued negative free cash flow (defined
as cash flow from operations less capital expenditures and dividends) beyond
current expectations could also result in negative rating actions.
Fitch affirms JBS's ratings as follows:
--Foreign & local currency Issuer Default Rating (IDR) at 'BB-';
--Notes due 2016 at 'BB-';
--National scale rating at 'A-(bra)'.
JBS USA LLC:
--Foreign and local currency IDR at 'BB-';
--Term loan B facility due in 2018 at 'BB'.
JBS USA Finance, Inc:
--Foreign and local currency IDR at 'BB-'.
JBS USA jointly with JBS USA Finance:
--Notes due 2014 at 'BB-';
--Bonds due 2020 at 'BB-';
--Notes due 2021 at 'BB-'.
--Notes due 2023 at 'BB-';
JBS Finance II Ltd:
--Foreign and local currency IDR at 'BB-';
--Notes due 2018 at 'BB-'.
The Rating Outlook for JBS S.A., JBS USA LLC, JBS USA Finance Inc. and JBS
Finance II Ltd is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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