The McDonald's Supplier Escaping Brazil's Bond Market Carnageby and
Mafrig posts biggest bond advance after asset sales, buyback
Real's depreciation boosts value of Marfrig's export revenue
As Brazil’s economy spiraled ever deeper into recession, meatpacker Marfrig Global Foods SA moved swiftly to shore up its finances by selling assets and eliminating jobs. The moves paid off in a big way in the bond market.
Marfrig’s $680 million of notes due in 2020 returned 5.7 percent in 2015, the biggest advance in Brazil’s corporate bond market. That’s no small feat considering that, on average, debt securities from the country suffered the deepest losses in at least 13 years.
And more gains may be in the offing, according to Quesnell Capital SA and Seaport Global Holdings LLC. In the face of continued deterioration in Latin America’s biggest economy, the Sao Paulo-based meat supplier to McDonald’s Corp. and Burger King Worldwide Inc. is looking to unload assets in the U.S. and Argentina and buy back debt this year to cut leverage even further.
“You have to sit up and take notice when a company is selling assets and reducing leverage,” said Michael Roche, a strategist at Seaport. “The period we’re in now -- it’s more of a survival mode.”
On Monday, a central bank survey showed that analysts now expect Brazil’s economy to suffer its deepest two-year recession since at least 1901, with gross domestic product shrinking 2.95 percent in 2016 after a 3.7 percent contraction last year.
Despite the outperformance, Marfrig’s bonds still don’t fully reflect the operational gains from restructuring measures as economic concerns overshadow the company’s improved fundamentals, said Marcelo Di Lorenzo, an investor relations officer at Marfrig.
“While Marfrig is a global company, investors still take into consideration that we are in Brazil,” Di Lorenzo said from Sao Paulo.
The meat producer will buy back bonds through November as it seeks to improve its credit profile, he said. He said Marfrig is in advanced talks to sell assets in the U.S. and Argentina to raise cash, without providing specifics.
The company sold its U.K. poultry operations for $1.5 billion in June and bought back $406 million in senior notes in October. The moves helped cut the company’s net debt to about four times earnings before interest, taxes, depreciation and amortization in the third quarter of 2015, the lowest since the end of 2010, data compiled by Bloomberg show.
“Marfrig, with the potential to announce a further tender to buy back bonds, possesses a near-term catalyst that can generate outperformance,” said Ian McCall, a money manager at Geneva-based Quesnell, which oversees $250 million of emerging-market debt including Marfrig bonds.
Yields on the company’s notes due in 2020 have risen 44 basis points in the past year to 9.63 percent, data compiled by Bloomberg show.
Marfrig is also benefiting from the plummeting value of Brazil’s real. The company has operations in 11 countries, and about 80 percent of its revenue is in foreign currency. The real weakened 0.4 percent to 4.0257 per U.S. dollar as of 1:15 p.m. in Sao Paulo on Wednesday, extending its decline in the last 12 months to 33 percent.
Beef exports from Brazil are expected to rise 10 percent this year to 1.76 million tons after Middle Eastern markets including Saudi Arabia lifted trade barriers, according to the Abiec exporters group.
“The dollar earners with domestic costs will be where the money flows,” Seaport’s Roche said. “The favored companies in Brazil are the outward-looking ones.”