Bond Traders Prefer Beef to Chicken as Marfrig Exit Stokes Surge

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For bond investors in Marfrig Global Foods SA, the meatpacker’s decision to get out of the chicken business couldn’t have come sooner.

With sales faltering and the sinking real swelling leverage at the Sao Paulo-based company, bondholders suffered ever-mounting losses earlier this year. To restore confidence, Marfrig said on June 21 it was selling its poultry producer in the U.K. for $1.5 billion. The move has paid off.

The meat supplier to McDonald’s Corp. and Burger King Worldwide Inc. is now rewarding debt investors with some of the biggest gains in emerging markets as Marfrig says the sale will help reduce leverage to a six-year low. Its $775 million of notes due 2020 have returned 5.6 percent since June 21, versus average losses of 0.1 percent for food-products companies based in developing nations.

“The main perception is that Marfrig’s leverage will diminish going forward, and this is pleasing bond investors,” Carlos Gribel, the head of fixed income at Andbanc Brokerage LLC, said by telephone from Miami.

A day after the sale of Moy Park Holdings Europe Ltd., Marfrig said its net debt relative to adjusted earnings will drop to 3.7 times by the end of 2015 from a seven-year high of 6.3 times in the first quarter.

Yield Plummet

In a June 21 statement, Marfrig said the sale of Moy Park - - a producer of fresh and processed poultry -- will allow Marfrig to focus on expanding its food-service business in Asia and the U.S. and to emphasize beef exports from Brazil to those regions. With the sale, Marfrig will no longer produce chicken.

Moy Park’s sale was a structural shift for Marfrig, vice president of strategic planning Marcelo di Lorenzo said in a telephone interview.

“This sale will save us some 300 million reais, which changes dramatically our free-cash generation while reducing leverage,” di Lorenzo said. “As soon as the operation is closed, we expect an even more positive reaction from the market and also from the rating agencies.”

The surge in Marfrig’s bonds has caused yields to tumble 1.3 percentage points since June 21 to 8.7 percent, data compiled by Bloomberg show.

More gains are in the offing, according to Omar Zeolla, an analyst at Oppenheimer & Co.

“Marfrig bonds have good upside potential and offer some protection from negative events in Brazil,” he said, referring to the slumping Brazilian economy and a bribery scandal that’s undermining confidence in the country.

Beef Bet

While the real’s 16 percent drop against the dollar this year has benefited Brazilian beef exporters like JBS, it’s hurt Marfrig. The company generates less than half of its revenue in the U.S. currency and a majority in the pound, euros and the real. By contrast, JBS gets 83 percent of its sales in dollars. Brazil’s real weakened 1.8 percent Wednesday to 3.2290 per dollar at 4:15 p.m. in Sao Paulo.

Ian McCall, a money manager at Quesnell Capital SA who bought Marfrig’s bonds earlier this year, said he’s betting the company will benefit from moves by China and the U.S. to lift bans on Brazilian beef exports this year.

“After selling Moy Park, Marfrig is more of a beef exporter,” McCall, who declined to specify when he bought the notes, said from Cascais, Portugal. “We’re very pleased with the performance it’s generated.”

(An earlier version of this story corrected the date of the Moy Park sale in the second paragraph.)

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