A JPMorgan Flub Adds to Pain of Scandal-Ridden JBS's Creditors

  • Bond selloff accelerates on bank report that’s later corrected
  • Junk-rated meat packer at center of Brazil bribery probe

Bondholders of Brazilian meat processor JBS SA may have thought the largest corruption case in modern history was more than enough to deal with. Then came the JPMorgan Chase & Co. note.

A report from a JPMorgan analyst on May 23 raised the possibility of JBS adding as much as $6.5 billion of new debt in the U.S., around double its current level of borrowings. The finding alarmed bondholders in the world’s biggest meat packer, exacerbating a selloff already underway, according to investors who trade the debt.

The next day, however, JPMorgan sent out a corrected note. It turns out that the first one had included a misreading of the terms governing the company’s debt, and the second report cut back the projection of how much new debt could be raised to $1.1 billion. The bonds that had tanked the day before recovered some of their losses.

It was just another sharp turn in the wild ride investors have taken with JBS, which is at the center of the political scandal known as Operation Car Wash that has roiled the Brazilian economy and threatens to topple the presidency.

For JPMorgan’s top-ranked research team, it was a rare misstep that added to the panicked trading on the JBS bonds amid the widening turmoil in Brazil, the investors said, asking not to be identified discussing trading in individual positions. The reaction in JBS’s bonds also underscores how, even after Wall Street banks have shrunk their research efforts over the last decade, analysts can have real influence over markets.

Seven Straight

Carla Casella, the New York-based analyst who wrote the reports, is a member of JPMorgan’s fixed-income research team, which has won the top spot in Institutional Investor’s bond research rankings for seven years in a row.

A spokeswoman for JPMorgan declined to comment. Representatives for JBS didn’t immediately respond to requests for comment.

The company’s $650 million of 2021 bonds in the U.S. dropped 6.9 cents to 95.6 cents on the dollar on Tuesday before gaining 3 cents the next day, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They were at 98.75 cents as of 4:13 p.m. in New York. JBS shares rose 23 percent to 8.21 reais ($2.50) on Thursday in Sao Paulo.

JBS remains weighed down by the turmoil encircling its owners, the Batista family, who signed a plea bargain admitting to bribes that have ensnared senior government officials including President Michel Temer. The meat packer’s parent company J&F Investimentos may be considering whether to sell some of its non-core assets to help pay possible fines and penalties as the Batistas look to negotiate a leniency deal that could help their businesses weather the scandal.

The company’s owners may raise funds in the U.S. to pay down debt at the parent company if the Brazilian business struggles, short-term lenders there tighten their credit on the company, or fines are levied, Casella wrote. 

JBS’s debt soared as it built itself through a $20 billion string of acquisitions that included U.S. companies Swift & Co. and poultry processor Pilgrim’s Pride Corp. On Monday, Moody’s Investors Service downgraded JBS and its U.S. subsidiary one step to Ba3, three levels below investment grade, citing risks linked to the scandal.

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