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Fitch Downgrades Marfrig's IDR to 'B'; Ratings Placed on Watch Negative



  Fitch Downgrades Marfrig's IDR to 'B'; Ratings Placed on Watch Negative

Business Wire

NEW YORK -- June 6, 2013

Fitch Ratings has downgraded to 'B' from 'B+' all international scale ratings
of Marfrig Alimentos S.A. (Marfrig) and its subsidiaries. Concurrently Fitch
has downgraded Marfrig's national scale rating to 'BBB(bra)' from 'BBB+(bra)',
as well as its debentures due in 2015. Fitch has also placed the ratings for
Marfrig and its subsidiaries on Rating Watch Negative. A full list of the
rating actions follows at the end of this press release.

The downgrades reflect Marfrig's weak operating performance and negative free
cash flow generation that resulted in increased debt since the end of 2011.
The ratings build in the expectation that Marfrig will sell assets during 2013
to lower leverage. The size and timing of these sales will determine the
status of the Rating Watch Negative.

KEY RATING DRIVERS

Weak Operating Results Have Increased Leverage

Marfrig's EBITDA increased to BRL2.0 billion in 2012 from BRL1.8 billion
during 2011. Despite EBITDA growth, working capital needs were high due to
rising grain costs and costs associated with the integration of assets
received from BRF S.A.'s (BRF) in an asset swap. Consequently, the company's
cash flow from operations declined to BRL 111 million from BRL 768 million in
2011. With capex at BRL870 million and dividends of BRL15 million, Marfrig's
free cash flow was negative BRL775 million in 2012. This compares unfavorably
with the company's negative free cash flow of BRL 175 million in 2011.

To bolster liquidity Marfrig issued BRL1.05 billion of equity during December
2012 and a USD600 million note in January 2013. Marfrig's operational
challenges of lowering its costs and integrating the assets received from BRF
continued during the first quarter of 2013, as the company's cash flow from
operations was a negative BRL179 million. Fitch expects the second quarterly
to be equally, if not more difficult, and the company to continue burning cash
through the end of 2013. As a result of the aforementioned, Marfrig's ended
March 31, 2013 with BRL13.6 billion of total debt and BRL3.2 billion of cash.
The company's total net debt to EBITDA ratio was 5.1x as of March 31, 2013, an
increase from 4.3x as of Dec. 31, 2013.

Asset Sales Likely in 2013

The 'B' and 'BBB (bra)' ratings reflect Fitch's expectation that Marfrig will
sell assets during 2013 but that its capital structure will remain highly
leveraged relative to its cash flow. The asset sales are essential for
maintaining Marfrig's liquidity and avoiding acceleration of USD 2.2 billion
of public debt that could be precipitated by a breach of financial covenants.
At the end of the first quarter, the company announced that it had targeted
gross debt reduction by up to BRL2.0 billion by the end of 2013.

At the end of March 31, 2013, the test of Marfrig's most restrictive financial
covenant of net debt to EBITDA stood at 4.4x. The maximum allowed level is
4.75x. With the expected deterioration of operating results during the second
quarter of 2013, this covenant's test is expected to approach or even exceed
its maximum level as early as June 30, 2013. The Negative Rating Watch
reflects Marfrig's tightening liquidity and proximity to covenants violation.

Business Portfolio Will Change

Marfrig's 'B' and 'BBB (bra)' ratings are supported by the quality of the
company's business portfolio, which includes strong performers such as Key
Stone, Moy Park in the UK and its beef business in Brazil. The company
acquired some of those assets in a series of acquisitions that resulted in
both product and geographic diversification which is positive for the ratings,
but also led to highly levered capital structure. Marfrig is in the process of
selling some assets. Fitch believes some of these assets will be sold in 2013
to meet the company's deleveraging goals. The presence of BNDESPAR as a
shareholder of 19.63% of Marfrig's equity provides additional support for this
company that operates in a strategic sector for the Brazilian economy.

Ultimately, Marfrig's ability to maintain a sustainable capital structure will
depend on its ability to start generating positive free cash flow, which in
turn hinges upon the company's success in executing its strategy to realign
business priorities, cut down cost, improve logistics, and establish itself as
a viable niche player in the branded food segment.

Marfrig's branded food portfolio grew in importance with the acquisition of
Seara a few years ago. This segment's contribution increased substantially in
the middle of 2012 with the acquisition of some of BRF's lower tiered brands,
production and logistics assets. Marfrig's Seara brand is positioned in the
second and third-tier of the industrialized food products, trading at 10 - 15%
to leading competitors in Brazil. The company aspires to reduce this price
gap, which, in Fitch's opinion, would require redefining Seara's brand
strategy. Additional investments would also be needed to allow Marfrig to
benefit from the market opportunity created by the CADE ruling of last year
that led to the suspension of product categories of BRF's Perdigao brand. The
company's financial and operational challenges could prevent them from
capturing this opportunity.

RATING SENSITIVITIES

Capital injections and or asset sales for debt reduction are expected to be of
a magnitude consistent with a capital structure of 'B' and 'BBB (bra)'. Sales
less than forecast by Fitch could result in a downgrade. A delay in these
sales, which leads to a covenant breach, could also lead to negative rating
actions.

An upgrade of Marfrig's ratings is unlikely in the near future considering the
challenges the company continues to face financially and operationally. The
company's capital structure is expected to continue to be highly leveraged
after asset sales. In addition, asset sales could limit the company's product
and geographic diversification, which could also be a constraining factor on
future rating actions.

Fitch downgrades the following as indicated:

Marfrig Alimentos S.A.

--Local currency IDR to 'B' from 'B+';

--Foreign currency IDR to 'B' from 'B+';

--National scale rating to 'BBB'(bra) from 'BBB+(bra)';

--BRL 300 million 3rd debentures issue (1st tranche) to 'BBB'(bra) from
'BBB+(bra)';

--BRL 300 million 3rd debentures issue (2nd tranche) to 'BBB'(bra) from
'BBB+(bra)'.

Marfrig Overseas Ltd

--Foreign currency IDR to 'B' from 'B+';

--US$375 million senior unsecured notes due 2016 to 'B/RR4' from 'B+/RR4';

--US$500 million senior unsecured notes due 2020 to 'B/RR4' from 'B+/RR4'.

Marfrig Holdings (Europe) B.V.

--Foreign currency IDR to 'B' from 'B+';

--US$600 million senior unsecured notes due 2017 to 'B/RR4' from 'B+/RR4'.

--US$750 million senior unsecured notes due 2018 to 'B/RR4' from 'B+/RR4'.

The ratings are informed by 'Fitch Parent and Subsidiary Linkage Criteria'.

In accordance with Fitch's policies the issuer appealed and provided
additional information to Fitch that resulted in a rating action that is
different than the original rating committee outcome.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology'

--'Parent and Subsidiary Rating Linkage'

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793032

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Contact:

Fitch Ratings
Viktoria Krane, +1 212-908-0367
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Gisele Paolino, +55 21 4503 2624
Director
or
Committee Chairperson
Joe Bormann, CFA, +1 312-368-1558
Managing Director
or
Media Relations:
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elizabeth.fogerty@fitchratings.com
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