Bloomberg News

Feeding Naked Chef’s Chickens Killing Biggest Bond Rally

March 01, 2013

Higher costs to feed chickens and pigs at Brazil’s Marfrig Alimentos SA (MRFG3) are imperiling the biggest bond rally among Latin American food companies this year.

Yields on the Sao Paulo-based food maker’s $734 million of notes due 2018 have edged up 0.12 percentage point since reaching a 1 1/2-year low of 8.84 percent on Feb. 20. The securities had returned 17 percent this year before reversing course, more than double the advance for all comparable bonds issued by food companies in Latin America.

Marfrig, which produces ready-to-eat chicken meals in the U.K. endorsed by celebrity chef Jamie Oliver and supplies hamburger patties to McDonald’s Corp. (MCD:US), became the most-indebted meatpacker in the Americas after $3 billion of acquisitions over the past five years and a $600 million bond sale in January to pay bank loans. After deducting capital expenses, Marfrig had a $321 million shortfall from its operations in the first nine months of last year and faces rising costs for corn and soybeans used to feed its livestock, meaning its bond advance was unsustainable, according to BCP Securities LLC.

“Corn and soybeans remain expensive,” Jansen Moura, a fixed-income analyst at BCP, said in a telephone interview from Rio de Janeiro. “The company bought some time by issuing bonds. The scenario is still challenging.”

An official at Marfrig, who asked not to be identified because of company policy, declined to comment on the performance of its bonds.

Global Expansion

Marfrig was created in 1986 in Brazil as a distributor of pork, beef, chicken, fish and vegetables, according to its website. It has since expanded into 15 other countries and sells products ranging from premium-quality packaged beef cuts to pork sausages for hot dogs. In 2011 it signed an agreement to start selling products under the brand of celebrity chef Jamie Oliver, who is the star of the British Broadcasting Corp. television show “The Naked Chef” and the ABC network’s “Jamie Oliver’s Food Revolution.”

Marfrig’s net debt at the end of the third quarter jumped to 4.7 times earnings before interest, taxes, depreciation and amortization, from 2.84 three years earlier.

That’s higher than the leverage ratio of 4.42 at JBS SA (JBSS3), the world’s top beef producer, and 3.93 for Minerva SA, Brazil’s third-largest meatpacker.

Swelling Debt

Marfrig’s debt swelled as it spent $1.26 billion to buy McDonald’s supplier Keystone Food LLC in 2010 and $705 million for Cargill Inc.’s Seara processed food unit the same year.

The latest debt figures don’t reflect January’s $600 million bond sale or the $508 million that the company raised by selling stock in December.

The record amounts of soybeans and corn that Brazilian farmers started harvesting last month have done little to help cut costs for Marfrig. Soybean futures, which jumped 18 percent in 2012 after reaching a record $17.835 a bushel in Chicago on Sept. 4, are up 2.4 percent this year. Corn futures rose 8 percent last year and have climbed 0.8 percent this year.

Feedstock accounts for about 73 percent of the company’s costs of products sold. Marfrig’s expenses for animal feed jumped 22 percent in the third quarter, compressing profit margins. Earnings before interest, taxes, depreciation and amortization were 8.7 percent in the period, down from 12 percent a year earlier.

‘Incrementally Improving’

“High feedstock prices will have a lasting effect on their margins,” Viktoria Krane, a director at Fitch Ratings, said in a telephone interview. Fitch rates the company’s dollar debt B+, four levels below investment grade.

As costs increase to feed livestock, Marfrig won’t be able to raise prices for the pizzas, sausages and margarine it produces because of competition from BRF - Brasil Foods SA, the largest Brazilian food-maker, Krane said. While Marfrig increased its food making capacity with the acquisition of several food-processing plants from BRF last year, it is still fighting to gain significant market share from its rival.

Both the December share sale and November’s appointment of former Cargill Chief Financial Officer Sergio Rial to head the Seara unit will help the company improve its financial profile, according to Ian McCall, an emerging-markets asset manager at Quesnell Capital SA.

“Their game plan going forward is to really work at incrementally improving their margins,” Quesnell, who bought bonds from Marfrig’s January sale, said in a telephone interview. “It’s worth being willing to give them a shot.”

Yield Spread

The extra yield investors demand to own Brazilian government dollar bonds instead of Treasuries climbed three basis points, or 0.03 percentage point, to 181 basis points at 2:13 p.m. in New York, according to data from JPMorgan Chase & Co.

The cost to protect Brazilian bonds against default for five years rose four basis points to 135 basis points. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The real weakened 0.1 percent to 1.9799 per dollar. Yields on interest-rate futures contracts due in January 2014 fell eight basis points to 7.61 percent.

Demand for high-yielding debt has been bolstered by investors’ reactions to the Federal Reserve’s so-called quantitative easing measures, Marco Aurelio de Sa, the head of fixed-income trading at Credit Agricole SA, said in a telephone interview from Miami. With the outlook for the world’s largest economy improving, the Fed may ease the measures, which in turn could lower demand for high-yield debt such as Marfrig, de Sa said.

“The bonds from Marfrig probably have reached their peak,” de Sa said. “Among the Brazilian high yields, they are among the riskiest in terms of credit and should suffer when the U.S. phases out its bond-buying program.”

To contact the reporters on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net; Lucia Kassai in Sao Paulo at lkassai@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net;


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