Fitch Affirms Marfrig Global Foods S.A.'s Ratings at 'B '; Outlook Revised to Positive
The Positive Outlook revision reflects the acceleration of Marfrig's deleveraging process following the divestment of Moy Park Holding Europe Ltd. (Moy Park) in September 2015 and the expectation that the company will improve free cash flow (FCF) over the next 24 months.
KEY RATING DRIVERS
Simplified Business Profile:
Marfrig's ratings incorporate its broad product and geographic diversification, which help to reduce risks related to disease, trade restrictions and currency fluctuation. Following recent divestitures, the company is structured into two business units: Marfrig Beef (61% of EBITDA), one of the world's largest beef producers, and Keystone Foods (39% of EBITDA), which processes food for major restaurant chains, notably McDonald's. These divestitures have allowed Marfrig to simplify its organizational structure and decrease execution risks associated with the turnaround of Seara Brazil, which was sold in 2013 to JBS S.A (JBS); Moy Park was also sold to JBS in September 2015. Marfrig will remain a global company after the transaction as 58% of its consolidated net revenue will come from international operations. Marfrig is implementing a strategy called 'Focus to Win,' which aims to increase revenue and improve profitability by focusing its commercial strategy on the development of its food service and retail channels.
Improved Credit Metrics:
Marfrig's pro forma net debt/EBITDA ratio is expected to fall towards 4.0x by year end 2015 as a result of satisfactory performance and the divestment of Moy Park to JBS in September 2015; net debt/EBITDA LTM was 4.8x at June 30, 2015. The divestment of Moy Park for a total of USD1.5 billion (USD1.2 billion paid in cash) accelerates the deleveraging process. Given the deleveraging process, Fitch expects Marfrig to report positive free cash flow in 2015 and 2016, as it has since 2014 after several years of negative FCF generation. The company is expected to focus on reducing leverage via increased EBITDA, better asset and logistics management, steady capex, and lower interest expense associated with liability management.
Challenging Domestic Operating Environment:
The operating environment in 2015-16 is expected to be more difficult for the Brazilian protein sector due to the weak economic environment, high inflation, increased interest and unemployment rates, and declining consumer confidence. The beef industry is responding to these challenges by reducing processing capacity in the country, and Brazilian exporters are benefitting from the depreciation of the reais along with growing demand for beef worldwide. Exports accounted for 48% of Marfrig Beef net revenue and around one-third of consolidated revenues. Asia and the Middle East remain the positive growth drivers for Marfrig. In May 2015, mainland China approved Brazilian beef imports, and in June 2015, the U.S. announced the opening of its market to Brazilian beef.
No Major Acquisitions Anticipated:
Marfrig is not expected to execute any major acquisitions over the next 18 months given management's focus on deleveraging its balance sheet, improving cash flow generation and reducing interest expense. Key initiatives will be the optimization of plants and distribution by Marfrig Beef and the geographic expansion of Keystone.
Fitch's expectations are based on the agency's internally produced, base case rating forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:
--Double-digit net revenue growth of continuing operations in 2015 due to price increases at Marfrig Beef and the devaluation of real against the U.S. dollar
--EBITDA margin of approximately 8 - 9%
--Capex/sales of approximately 2.6% in 2015
--Positive free cash flow
--Pro forma net debt/EBITDA at about 4.0x in FY2015.
Negative: A negative rating action could be precipitated by Marfrig's inability to improve FCF over the next 24 months and maintain net leverage above 4.5 - 5.0x on a sustainable basis.
An upgrade could result from a combination of the company building a track record of generating positive FCF, demonstrating the resilience of its group's operating margin in its beef business in Brazil, while a sustained net leverage ratio near 3.5x also would be viewed positively.
Marfrig's liquidity is adequate. As of June 2015, the group held BRL2.6 billion of cash and marketable securities, which includes BRL731 million of credit-linked notes which Fitch consider as restricted cash. This level of liquidity compares with short-term debt of BRL1.9 billion. Marfrig's largest refinancing requirement will be in 2018 (BRL3 billion), as the company has redeemed most of its 2016 bond. The company continues to be actively engaged in liability management to reduce debt and interest expense. Marfrig is using part of cash proceeds of the divestment of Moy Park to buy back outstanding bonds. Almost 92% of the company's debt is in U.S. dollars and foreign currencies (excluding the real); 78% of net revenue is pegged to currencies other than the BRL.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
--Foreign & local currency IDR at 'B+';
--National scale rating at 'BBB+ (bra)'.
Marfrig Holdings Europe B.V.:
--Foreign currency IDR at 'B+';
--Notes due 2017, 2018, 2019, 2021 at 'B+/RR4'.
Marfrig Overseas Ltd:
--Notes due 2016, 2020 at 'B+/RR4'.
The Rating Outlook is Positive.