Bloomberg News

Marfrig Credit Grade May Be Cut by Moody’s on Global Slowdown

November 01, 2011

Oct. 31 (Bloomberg) -- Marfrig Alimentos SA may have its debt ranking cut by Moody’s Investors Service as Latin America’s second-largest beef producer is weighed down by high raw material prices, the slowing global economy and a decline in the Brazilian currency.

The company’s B1 grade could be lowered if Marfrig fails to recover its operating margins, Moody’s said in a statement yesterday. The rating firm changed its outlook to negative from stable, affecting $1.625 billion of notes.

The Sao Paulo-based firm swung to the worst quarterly loss in at least four years after a rise in corn prices sent animal feed costs higher. Its stock has declined by 50 percent this year, outpacing the 14 percent decline in the Bovespa index and the firm’s bonds are trading at levels considered distressed.

The change also reflects the challenges Marfrig has to integrate “a significant number of sizeable acquisitions,” including the $1.26 billion purchase of Pennsylvania-based Keystone Foods LLC in 2010, Moody’s analyst Marianna Waltz said in the report.

While a decline in the Brazilian real has benefited the country’s exporters, it’s increased Marfrig’s debt to earnings, because about 71 percent of the company’s debt is dollar- denominated, Waltz said.

Marfrig’s $750 million of 8.375 percent notes due in 2018 have tumbled to 77.75 cents from 99.5 cents on the dollar in May, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The bonds yield 11.9 percentage points more than similar maturity U.S. Treasuries. Spreads of more than 10 percentage points are considered distressed.

Net Loss

Marfrig’s B1 ranking is the fourth level of speculative- grade. Debt ranked in this tier on average pays a spread of 6.96 percentage points, Bank of America Merrill Lynch index data show.

The company said on Aug. 15 it had a net loss of 91 million reais ($56 million), or 26 centavos a share, in the second quarter, compared with a restated profit of 103.8 million reais, or 30 centavos, a year earlier,

Marfrig fell 0.6 percent to 7.80 reais per share in the Sao Paulo stock exchange on Oct. 28. Chief Executive Officer Marcos Antonio Molina dos Santos boosted in October his stake in the meatpacker to 45 percent from 43.5 percent.

The share purchases were motivated by his “confidence in the company’s solid fundamentals and its significant potential to create value,” Molina said in an Oct. 19 statement.

JBS SA is Latin America’s largest beef producer.

--With assistance from Boris Korby in New York. Editors: Pierre Paulden, Joe Sabo

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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