Fitch Rates BRF GmbH's Proposed Senior Unsecured Notes 'BBB (EXP)'
KEY RATING DRIVERS
Strong Business Profile:
BRF is one of Brazil's largest food companies and one of the largest poultry exporter worldwide. The company's cash flow benefits from strong domestic brands that have given the company market shares that range between 50% and 60% in many market segments. While entry barriers to the processed food segment are relatively low, BRF benefits from its extensive product offering, strong brand recognition, recurring innovation and extensive distribution capacity for refrigerated products in Brazil. The company's business profile benefits from its geographical diversification with approximately 58% of its sales occurring outside of Brazil.
Fitch expects a contraction of BRF's EBITDA margin in 2016 due to the increase of raw material cost and the subdued economic environment in Brazil. In the first half of 2016 (1H16; June 30, 2016), the market price of corn and soybean meal increased by 83% and 20% year-over-year in Brazil. As a result, BRF's EBITDA margin decreased to 11.8% from 15.6% in 1H15. Fitch expects the company to gradually improve profitability thanks to price increases, volume growth in international markets and a reduction of cost pressure going forward. As of 1H16, the company average prices increased by 6.9% compared to 1H15.
Fitch expects BRF to pursue bolt-on acquisitions to expand internationally. While Fitch expects BRF to focus on improving efficiency and securing its market share in Brazil, more acquisitions might occur outside Brazil to fuel revenues growth. As of 1H16, the company spent BRL2.8 billion in acquisitions. The company has completed several acquisitions in recent years, including the acquisitions of GFS in Thailand, Campo Austral and Calchaqui in Argentina, Universal Meats in the United Kingdom, AKF in Oman, QNIE's frozen distribution business in Qatar.
Leverage and Rating:
Fitch expects BRF net leverage to increase towards 2.4x in fiscal year end 2016 (FYE16) from 1.5x in FYE15 due to lower EBITDA margins, acquisitions and share buyback. Fitch rates BRF above Brazil's country ceiling of 'BB+' as the company benefits from hard currencies revenues from exports revenues, cash abroad and undrawn committed bank lines in foreign currency.
Fitch's key assumptions within the rating case for BRF S. A.
--High single-digit revenue growth due to the subdued economic environment in Brazil, but a positive impact from export market;
--Decrease in EBITDA margin due to raw material cost increase;
--Net debt to EBITDA below 2.75x.
A rating downgrade could be triggered by a substantial deterioration in BRF's operating margins and free cash flow (FCF) generation. This, coupled with market share erosion beyond anticipated levels from competitive pressures and/or a net leverage increase of above 2.75x from a large debt-financed acquisition, could result in negative rating actions. A further downgrade of Brazil would put pressure on BRF's ratings.
An upgrade is unlikely given Brazil country ceiling rating of 'BB+'. However, a more conservative stated financial policy established by management regarding cash return to shareholders and credit would be viewed positively.
As of June 30, 2016, BRF had BRL4.6 billion of cash and cash equivalents and BRL3.7billion of short-term debt. Around 26% of debt is short term. Approximately 59% of total debt is foreign-currency denominated. BRF has an undrawn revolving credit facility of USD1 billion due to 2019.
Fitch currently rates BRF as follows:
BRF S. A.:
--Foreign Currency Long-Term Issuer Default Rating (IDR) 'BBB'; Outlook Negative;
--Local Currency Long-Term IDR 'BBB'; Outlook Stable;
--National scale rating 'AAA(bra)'; Outlook Stable;
--Notes due 2018, 2022, 2023, 2024 'BBB'.
BFF International Ltd 'BBB';
--Senior unsecured notes due 2020 guaranteed by BRF S. A. 'BBB'.
--Senior unsecured notes 'BBB (EXP)'.