An Emerging Market Beef Bond Is About to Escape the Herd
JBS SA began as a humble butcher shop in Anapolis, Brazil and grew to become the world’s biggest producer of beef and chicken. With operations already spanning Argentina to Australia, it recently announced a restructuring that may see it come even looser from its Brazilian moorings.
The company announced plans to create a New York-listed unit earlier this month, and said it may shift its corporate registration to Ireland with the aim of saving on financing costs.
“JBS doesn’t have the same access to capital as other global players,” Wesley Batista, the company's CEO, said in an interview with Bloomberg News this week. "We’re seeking a structure that better reflects the company JBS has become."
He may be on to something, according to Citigroup Inc. credit strategists Eric Ollom and Ayoti Mittra.
They estimate that emerging market (EM) companies with large multinational operations could stand to save 150 basis points in financing costs by making the switch to developed markets, or DMs. Their analysis is based on comparing JBS bonds with debt sold by its U.S. unit, Pilgrims Pride Corp., and also examining the spread differential between similar bonds sold by Russian mobile operator VimpelCom Ltd. and Millicom International Cellular SA.
"Another way to look at this is how much more spread is required by investors to hold EM paper vs DM paper, all else being equal," the analysts write. "It is this differential that investors in the EM part of the JBS complex have as potential upside if the company is successful in transitioning its investor base to DM."
Key to such savings is the inclusion of the bonds in benchmark indexes tracking developed market debt. In JBS's case, a relocation to Ireland and a listing on the New York Stock Exchange could mean as much as $6 billion worth of bonds become eligible for developed market indexes, they say.
"It is said that beauty lies in the eye of the beholder. It could also be said that risk premium lies in what 'country of risk' for a particular issuer is used by an index family," the Citi analysts write. "Index families tend to be based on rules, not judgement."
Relocating to developed markets could be attractive for companies worried that they'll be tainted by rising risk premiums in their home countries, at a time when low oil prices and a strong U.S. dollar have pressured emerging market finances. Companies that might benefit from relocation include other multinationals in Brazil, as well as Cemex SAB, American Movil SAB, and Grupo Bimbo SAB in Mexico, Citi says.
But there are tradeoffs to such a move, including tax implications and potentially higher costs incurred satisfying corporate disclosure and governance rules required by other jurisdictions.
"In all cases, a change in domicile may involve loss of tax credits or other factors that are not worth the savings in interest expenses," they caution. "In addition a credible portion of the business would need to be located in a DM to justify there rationale."