Growing Debt Raises Alarms for Brazil's Chicken Giant as CFO Resigns

  • BRF rating outlook cut to negative by S&P as net debt surges
  • Company’s bonds, shares have underperformed as results slump

One of Brazil’s last remaining investment-grade credits is coming under fresh scrutiny from bond buyers after a surprise jump in its debt levels.

BRF SA, the country’s largest chicken exporter, saw leverage ratios surge last year as aggressive investments and shareholder payouts were followed by a record loss, leading S&P Global Ratings to cut its outlook on the debt to negative Thursday. A few hours later, BRF said Chief Financial Officer Jose Carneiro Borges was resigning as the company reassesses its management model.

BRF is suffering from a surge in costs to feed its animals following a drought last year that sapped Brazil’s corn harvest, and reduced domestic demand for its meats amid the country’s worst recession in a century. As a result, cash from operations fell by more than half in 2016 to the lowest in five years, according to data compiled by Bloomberg. Meanwhile, the company spent more than 2.5 billion reais ($790 million) in overseas takeovers and 1.7 billion reais to buy back shares and pay dividends to shareholders.

"This is a deteriorating credit," said Jorge Piedrahita, the chief executive officer of New York-based broker Torino Capital. "Aggressive expansion, slightly higher leverage and so on suggests future widening."

BRF’s $750 million of notes due 2024 fell for a fourth day Friday, extending their losses to 3.4 percent since the company reported a record 372 million real loss on Feb. 23. That is the worst performance among 285 corporate bonds from similarly rated food companies.

The company’s shares have lost a quarter of their value in the past year, compared to a 31 percent gain in Brazil’s benchmark stock gauge.

"BRF’s credit metrics remain more pressured than our previous forecasts and are still subject to cash flow volatility," S&P, which rates BRF two levels above junk, said in its report. The negative outlook, which follows a similar move from Fitch Ratings in October, reflects a one-in-three chance of a downgrade in the next 12 to 18 months.

Andre Mota, investor relations manager at BRF, said deleveraging is "an important goal" for the company and that proceeds of the planned capitalization of halal subsidiary One Foods Holdings Ltd. will help bring debt levels down.

"S&P recognizes the cyclical characteristic of our business, otherwise we might have had a downgrade," he said by phone.

While BRF is working on changes to its management model, the CFO’s resignation was a personal decision and had no connection with the company’s credit metrics, Mota said.

Net debt increased by 52 percent last year to 11.1 billion reais, jumping to 3.3 times earnings before earnings before interest, taxes, depreciation and amortization from 1.3 times a year earlier, according to the company’s financial statement. The leverage is the highest since 2009, data compiled by Bloomberg show.

BRF’s metrics should recover over the coming quarters on lower livestock-feed costs, a rebound in Brazil’s economy and an expected capital injection for One Foods, according to Johnny Da Silva, a director at Fitch. More disciplined spending on acquisitions and dividends would also be a big help, he said.

"They have tools to reduce the leverage," Silva said in a phone interview. "Now, they have to deliver it."

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