McDonald’s Beef Bonds Plummet on Marfrig CEO Exit

The surprise departure of Marfrig Global Foods SA’s cost-cutting chief executive officer is triggering alarm among bondholders and raising doubts over management’s commitment to rein in debt.

Its $775 million of notes due in 2020 tumbled by the most since April 2013 on Jan. 15, after the hamburger supplier to McDonald’s Corp. said Sergio Rial will leave next month. In the past year, the bonds had the biggest returns among 100 junk-rated food companies on optimism Marfrig would generate more cash than its spends for the first time since 2007.

During his one-year tenure, Rial focused on cutting debt, selling assets and closing plants. Interest expenses plummeted and earned Marfrig upgrades on its debt ratings. With Rial’s exit, investors are concerned the meatpacker won’t keep up with his turnaround plan, said Quesnell Capital SA’s Ian McCall.

“Marfrig lost its head cheerleader,” McCall, a money manager at Geneva-based Quesnell, which oversees $107 million, said in an e-mail. “Rial was the visible face who orchestrated the turnaround.”

The company said in a regulatory filing yesterday that Rial, a former Cargill Inc. and Bear Stearns executive, will be replaced on Feb. 16 by Martin Secco Arias, the head of Marfrig Beef Southern Cone. He’s leaving the meatpacker to become the chairman of Banco Santander SA’s Brazilian unit, according to a person with direct knowledge of the matter.

No ‘Surprise’

Marfrig has been working with transparency, and the continuity of results will be recognized by the market, Chief Financial Officer Ricardo Florence said in a telephone interview, when asked to comment about the drop in the company’s bond prices.

“There won’t be any kind of surprise,” Rial told investors and analysts during a conference call yesterday. “Martin as well as the other members of the executive committee were part of everything we committed to the market.”

Secco has worked for Marfrig Global Foods since 2007, when the company bought Frigorifico Tacuarembo in Uruguay, in which he was a shareholder. Marfrig’s units under his command included those in Uruguay, Argentina, Chile and the state of Rio Grande do Sul in Brazil.

Bond Spread

Even after yesterday’s bond plunge, the difference between yields on Marfrig notes and those of larger meatpacker JBS SA has narrowed to 3.4 percentage points from 3.7 percentage points a year ago, according to data compiled by Bloomberg.

On Nov. 4, Fitch Ratings boosted Marfrig’s rating one level to B+, four steps below investment grade, after a similar decision by Standard & Poor’s two weeks earlier.

The upgrade reflects expectations the company will generate cash over the next two years from its operations, even after capital expenses, Fitch said. Contributing factors should include higher earnings, lower interest expenses and better working capital management, according to the rating firm.

Brazil’s real rose 0.8 percent to 2.6223 per dollar today.

In the two years through September, the meatpacker’s net debt decreased 22 percent to 7.3 billion reais ($2.8 billion), data compiled by Bloomberg show. Its third-quarter interest expense was the lowest for the period since 2009, the data show.

The management shift shouldn’t result in a major change in strategy, according to Guilherme Moura Brasil, an analyst at Banco Fator Corretora in Sao Paulo.

‘Investment Thesis’

“This announcement does not change our investment thesis since we believe the company’s strategy will continue the same,” he wrote in a report to clients.

During the conference call, Rial also said the meatpacker isn’t currently planning any takeovers. Marfrig had made 20 acquisitions in the six-year period before Rial became CEO. His arrival was a turning point at a time when Marfrig was spending a “lot of money,” according to Klaus Spielkamp, the head of fixed-income sales at Bulltick LLC.

“Investors are not going to sit down and wait for what this other guy will deliver,” he said in a telephone interview from Miami.

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