Fitch Rates BRF's Proposed Senior Unsecured Notes 'BBB-'
NEW YORK -- May 9, 2013
Fitch Ratings has assigned a 'BBB-(exp)' rating to the proposed benchmark size
10-year notes offering of BRF S.A. (BRF). These senior unsecured obligations
will rank equally with all of BRF's existing and future senior and unsecured
indebtedness. The proceeds from the offering will be used to extend the
maturity profile of the company's debt through the refinancing of shorter term
debt. A complete list of BRF's current ratings follows at the end of this
KEY RATING DRIVERS
The 'BBB-(exp)' rating takes into consideration BRF's strong business profile
as one of the largest producers and distribution of food in Brazil. The
company is the largest poultry exporter worldwide and has market shares of
more than 50% in most of its product segments domestically. BRF benefits from
its extensive products offering and strong brand recognition, which allows it
to charge premium prices. Its geographically diversified production base
throughout Brazil mitigates risks related to disease, the imposition of
sanitary restrictions by foreign governments, as well as tariffs or quotas
applied regionally by some importing blocs or countries.
The rating is constrained by BRF's leverage. As of March 31, 2013 BRF's net
debt to EBITDA was 2.7x, notably above the company's long term target of 2x.
This leverage reflects BRF's depressed financial performance during 2012,
which was negatively affected by weaker than expected export markets and
elevated cost related to higher corn prices. Increased expenses related to
assets transferred to Marfrig Alimentos S.A. (Marfrig) and the launch of new
products geared towards protecting the company's market share after the
suspension of certain Perdigao brands also contributed to weak profitability.
The asset swap and the brand suspensions were necessary to satisfy the ruling
made by CADE, the Brazilian antitrust authority, regarding the merger of Sadia
and Perdigao into BRF.
BRF is poised to benefit from several positive factors in 2013. They include
an improvement in the company's export markets, price increases domestically,
the realization of further synergies from the Sadia integration and the
winding down of costs related to the asset swap. These factors were in play
during the first quarter of 2013, when the company's EBITDA margin improved to
11% as compared to 7.9% during the first quarter of last year. Potential risks
that would slow down BRF's operational recovery include intensified
competition in the company's domestic segment, softening of consumption due to
inflation, higher grain prices, and currency exchange rate volatility.
Fitch expects that BRF's cash flow generation will be constrained by the
company's investment program. BRF is expected to invest BRL2 billion in capex
in 2013. During 2012, free cash flow generation was negative BRL374 million
after BRL2.4 billion of capex and BRL440 million of dividends. While BRF's
expansion program has a large discretionary component, the company's strategy
is geared toward expansion in the medium and long term, which takes priority
over cash preservation in the short term.
Positively, the company's acquisition program was put on hold during the
transition period. However, Fitch expects that once operations improve the
company will continue to pursue diversification through both organic growth as
well as acquisitions. This will mitigate some of the risks associated with the
industry. Fitch notes favorably that BRF has a long track record of equity
infusions to support the balance sheet while executing its growth strategy.
BRF's ratings are unlikely to be upgraded in the near term. The continuation
of the recent positive operating results coupled with improvements in leverage
and/or capital injection to repay debt may lead to a revision of the BRF's
corporate Rating Outlook to Stable from Negative.
A rating downgrade could be triggered by a slow reduction of the current
leverage, as a result of a lack of improvement or a further deterioration in
the company's operational performance. Large dilutive debt financed
acquisitions, a continuation of negative FCF beyond the short term, and/or a
significant deterioration of operations due to trade restrictions or sanitary
outbreaks would also be viewed negatively.
Fitch currently has the following outstanding ratings for BRF:
--Foreign & local currency Issuer Default Rating 'BBB-';
--National scale rating at 'AA(bra)';
--Notes due 2022 at 'BBB-';
--Notes due 2020 issued by BFF International Ltd. and guaranteed by BRF and
Sadia at 'BBB-';
--Bonds due 2017 issued by Sadia Overseas Ltd. and guaranteed by BRF at
The Outlook is Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 13, 2010);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research
Corporate Rating Methodology
National Ratings Criteria
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