JBS Bonds, Stock Tumble Amid Concern Over Brazil Fraud Probe

  • Newspaper reports some executives may have to step aside
  • Loss of CEO may push back restructuring timing, analyst says

JBS SA bonds and shares tumbled amid concern that the chief executive officer of the world’s largest meat producer may have to step aside as part of a Brazilian police probe into pension funds.

CEO Wesley Batista gave testimony in the investigation after police raided the offices of parent company J&F Investimentos and its pulp producer, Eldorado Brasil Celulose SA, early Monday, a press officer said. JBS plunged in Sao Paulo Tuesday, pushing a two-day drop to 15 percent after newspaper O Estado de S. Paulo reported that the judge responsible for the case ordered 40 executives named in the probe to step aside at their respective companies. The judge’s decision would apply to Batista and his brother Joesley, who acts as J&F’s CEO and JBS’s chairman, the newspaper said. The company said in a filing that it still hasn’t had access to the ruling.

JBS’s $1 billion in notes due in 2020 fell 2.6 percent to 103.65 cents on the dollar at the close in New York, the biggest decline since January. The meatpacker’s notes due 2023 and 2024 also dropped at least 3 percent each. The shares tumbled as much as 8.3 percent in Sao Paulo on Tuesday to 10.27 reais before closing down 1.7 percent at 11.01.

The probe comes at a particularly sensitive time for JBS, which announced in May a corporate restructuring and plans to list its shares in New York.

"If Mr. Batista steps down it would increase the likelihood that the timeline for the restructuring deal might be stretched," Itau analyst Antonio Barreto said in a report Monday, reducing his rating to market perform from outperform. "We believe that the restructuring is an important trigger for the stock performance."

BTG Pactual’s analyst Thiago Duarte also cut his recommendation on the shares to neutral from outperform, in a report citing a potential bumpy transition process "at a company where the controlling family has so far exerted so much influence in pretty much all the key decisions."

U.S. Plan

Brazilian federal police carried out 127 court orders Monday in an investigation into the country’s largest pension funds, saying there’s evidence of organized criminal groups among business leaders, pension-fund managers, companies that rated assets and private-equity fund managers, according to an e-mailed statement.

The potential removal of the Batista brothers at JBS "would be negative, especially given the important role they played in the company’s growth," said Rafael Ohmachi, an analyst at brokerage Guide Investimentos in Sao Paulo. "The operation could also derail JBS’s plans of becoming a publicly traded company in the U.S., which has been highly anticipated by the market."

Two of the pension funds being investigated invested 550 million reais ($168 million) in Eldorado in 2009 and owned a stake valued at 3 billion reais as of December, J&F said in a separate statement. It said that company executives are cooperating with police.

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