Marfrig Bond Rally Defies S&P as Traders Bet U.S. Purchase Will Fuel Sales

Bond traders are giving Marfrig Alimentos SA a vote of confidence even as credit rating companies say they may downgrade Latin America’s second-largest beef producer following a $1.3 billion acquisition in the U.S.

Yields on Marfrig’s 9.5 percent bonds due in 2020 have dropped 32 basis points, or 0.32 percentage point, to a seven- week low of 9.87 percent since the Sao Paulo-based company agreed to buy Keystone Foods LLC, a U.S. meat processor that supplies McDonald’s Corp. and Campbell Soup Co. on June 14, according to data compiled by Bloomberg. The decline tops the average 16-basis-point drop on Brazilian corporate dollar debt, according to JPMorgan Chase & Co.’s CEMBI index.

The bonds are rallying as speculation the purchase will bolster the company’s profit margins outweighs concerns raised by Standard and Poor’s and Moody’s Investors Service that the acquisition may saddle the company with too much debt. Marfrig said the purchase may help it almost triple net sales this year to 27.8 billion reais ($15.8 billion).

“It’s a good deal,” Bevan Rosenbloom, an emerging-market debt strategist with RBS Securities Inc. in Stamford, Connecticut, said in a June 17 telephone interview. “The company is drastically changing its business profile” and its bonds are undervalued, he said.

Marfrig plans to finance the acquisition by selling 2.5 billion reais of bonds that will convert into shares after five years. The bonds will pay an interest rate equal to the country’s 10.1 percent overnight interbank lending rate plus 1 percentage point.

Marfrig’s Growth

Keystone, based in West Conshohocken, Pennsylvania, would be Marfrig’s 39th acquisition in three years. The takeovers, including the purchase of Cargill Inc.’s Brazilian poultry and pork business for $705 million, more than quadrupled revenue to 9.6 billion reais last year from 2.1 billion in 2006, according to data compiled by Bloomberg.

“The deal makes strategic sense, given that Marfrig wants to diversify to consumer products and food service,” said Marcelo Menusso, a corporate bond analyst for Deutsche Bank AG in New York. “The 10 percent yield is not bad.”

Moody’s questioned whether Marfrig has the capacity to cope with the “fast pace” of growth. The acquisition is likely to “stretch” its balance sheet, Moody’s analysts wrote June 16. Moody’s put the company’s B1 rating on review for possible downgrade, matching the move that S&P made that day with its B+ ranking. Both ratings are four levels below investment grade.

Bond Accounting

Moody’s and S&P said they’re still figuring out if the convertible bonds will be counted as debt or equity.

“We have to understand the financial implication of the acquisition,” Reginaldo Takara, an S&P analyst in Sao Paulo, said in a telephone interview. “In principal, if the indenture is considered as debt, then we will see a more leveraged profile initially.”

Moody’s will keep the company at B1 should it determine the securities are equity, Ricardo Kovacs, a senior analyst at Moody’s in Sao Paulo, said in a phone interview. A Marfrig spokesman declined to comment.

Net debt to earnings before interest, tax, depreciation and amortization will decline to 3.1 times by the end of this year from 4 in the first quarter, Marfrig said in a presentation to analysts after announcing the acquisition. The average ratio for companies in Brazil’s Bovespa benchmark stock index is 1.4, according to Bloomberg data.

Stock Drops

Marfrig’s bonds outperformed its stock last week because the additional shares from the convertible bonds may dilute earnings.

The stock lost 1.5 percent since June 14, compared with a 1.4 percent gain in the Bovespa. The price on the 9.5 percent bonds due in 2020 climbed to 97.27 on June 18 from 95.73 on June 14. Marfrig issued the bonds on April 29 at a price of 98.43.

Elsewhere in Brazil’s credit markets, the yield premium on the country’s dollar government bonds over U.S. Treasuries narrowed four basis points today to 219, according to JPMorgan’s EMBI+ index. The gap’s declined 32 basis points from a nine- month high of 251 on June 8.

The cost of protecting the debt against non-payment for five years with credit-default swaps fell 2 basis points today to 126, according to data compiled by CMA DataVision. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Real Gains

The real strengthened 0.1 percent to 1.7712 per dollar today, trimming its loss this year to 1.5 percent. The yield on Brazil’s interest-rate futures contract due in January, the most active in Sao Paulo trading, fell two basis points to 11.29 percent.

Marfrig’s 9.625 percent bonds due in 2016 outperformed those issued by competitors JBS SA, the world’s biggest beef producer, and Minerva SA, Brazil’s fourth-largest meat producer, last week. Yields on Marfrig’s bonds dropped 25 basis points since June 14 to 9.92 percent, according to data compiled by Bloomberg. JBS’s 10.5 percent bonds due in 2016 yielded 8.8 percent on June 18, down from 8.86 on June 14. Minerva’s 9.5 percent notes maturing 2017 declined six basis points to 9.97 percent.

Marfrig’s 2016 bond yields are still up 156 basis points from a record low of 8.07 percent on March 18.

“The market hasn’t appreciated the real value,” RBS’s Rosenbloom said. “This company has a track record. Every acquisition they made has created value and brought synergy.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Gabrielle Coppola in New York at gcoppola@bloomberg.net

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