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Marfrig Bonds, Shares Tumble on Speculation Covenant Broken

Bonds issued by Marfrig Alimentos SA, the most indebted meatpacker in the Americas, posted the biggest drop since 2011 and shares plunged on speculation it broke a covenant on local debt.

The company’s dollar bonds due 2016 dropped 5.60 cents to 94.23 cents on the dollar at 5:46 p.m. in New York, according to data compiled by Bloomberg. That’s the biggest drop since October 2011. Yields on the notes soared 1.96 percentage points to 11.64 percent. Marfrig said in a statement after markets closed that it “vehemently” denies any covenants were breached.

Concern that the Sao Paulo-based company has failed to comply with a local bond covenant setting maximum debt leverage ratios is undermining investor confidence, according to Marco Aurelio de Sa, the head of fixed-income trading at Credit Agricole SA’s Miami brokerage unit.

A press official for Marfrig didn’t respond to a telephone call and e-mail seeking comment.

“The company is still highly leveraged,” Henrique Koch, an analyst at Banco do Brasil SA, said in an phone interview from Sao Paulo. “They’re always looking for alternatives, and it seems they’re not being very successful.”

The shares slumped 4.1 percent to 6.28 reais.

‘Speculative Attack’

Marfrig said in the filing that rumors about the company were spreading as part of “a speculative attack driven by certain market agents that seek to confuse the market to obtain financial gains.”

“The company vehemently refutes that there was any breach of financial covenants,” according to the filing. “Management reaffirms its strong commitment to reducing the company’s debt levels and making operational improvements to add value to its shareholders.”

Marfrig hired executives from Cargill Inc. and Deutsche Bank AG over the past five months as it seeks to sell assets and cut costs following an acquisition spree that drove debt levels up eightfold in five years.

Marfrig’s net debt rose to 9.2 billion reais in the fourth quarter, or 4.3 times earnings before interest, taxes, depreciation and amortization, from 3.9 times in the previous quarter, Marfrig said in its earnings report last month. It had a shortfall from operations after financial expenses, or negative free cash flow, of $1.1 billion in 2012.

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