S&P: JBS S. A. And JBS USA Downgraded To 'BB' From 'BB+' On Weaker Liquidity; Outlook Stable
The downgrade reflects JBS's weaker liquidity following two quarters of cash drain to liquidate derivative positions, poor working capital management, and lower-than-estimated operating cash flows. We revised our assessment on the company's liquidity to less than adequate from adequate to reflect our view of a diminished financial flexibility amid still sizable short-term maturities and difficulties to recover margins of the group's main businesses, such as the U. S. beef and Brazilian poultry operation at Seara. We expect the US beef's margins to rise to 4% in the second half of 2016 given a stronger demand for beef and higher cattle availability. However, high grain prices in reais will continue to pressure Seara. Therefore, its margins will start to rebound only in fourth quarter 2016 due to a higher share of value-added products.
The stable outlook reflects our belief that JBS's global business and geographic diversification will help its cash flows to bounce back, while improving cash position and leverage metrics. Our view of JBS's financial policy as negative, and ultimately the downgrade, reflects the recent earnings volatility. And weak track record of forecast achievement reflects our recent change of management and governance assessment to fair from satisfactory. However, another unexpected loss could prevent JBS from maintaining debt to EBITDA below 4x and FFO to debt trending to 20% in 2017.