JBS German subsidiary ESAL announces reopening of US$500M senior unsecured notes due 2023; notes given BB- rating by Fitch

Nevin Barich

NEW YORK , April 8, 2013 (press release) – JBS S.A. (JBS) wholly owned subsidiary ESAL GmbH (ESAL) has announced the reopening of its USD500 million senior unsecured notes due 2023, which will carry the same rating as the original deal of 'BB-', according to Fitch Ratings.

The proceeds from the current offering are expected to be used to refinance shorter maturity indebtedness and for general corporate purposes. These notes are unconditionally guaranteed by JBS and JBS Hungary Holdings Kft.

Concurrently, Fitch has affirmed JBS's ratings and revised its Ratings Outlook to Stable from Negative. A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

The 'BB-' rating takes into consideration JBS's strong business profile, as the world's largest beef, leather and pork producer and one of the largest producers of chicken and lamb. Further factored into JBS' ratings are the company's geographic and product diversity, which partially mitigates the risks of trade barriers and animal diseases. JBS has high leverage and its risk profile is above average due to cyclical risks associated with the meat business and the company's aggressive attitude toward growth through acquisitions.

The revision of the Ratings Outlook was prompted by improving business outlook for JBS in 2013, particularly at its chicken division in the U.S., Pilgrim's Pride (PPC). Fitch notes positively the tangible reduction in leverage achieved by JBS in the second half of 2012, mainly due to the turnaround in its US beef operations. While cattle availability continues to be an issue in certain parts of the US, the division is expected to remain profitable in 2013, albeit at a reduced levels. More importantly, price increases in chicken cuts in the US in the latter part of 2012 suggest that the industry as a whole has responded faster than expected to reduce volumes in response to elevated grain prices. As a result, Fitch now anticipates that this division will show stronger than expected profitability in 2013.

Leverage Reduction through Improving Operations

Fitch considers net debt-to-operating EBITDA in the 3.0x range to be the normalized leverage ratio for the 'BB-' rating category for companies in the protein industry, which face volatile and cyclical operating earnings. As of Dec. 31, 2012, JBS' net leverage ratio stood at 3.4x, and Fitch expects this ratio to decline to about 3.0x by the end of 2013. Generating positive free cash flow (FCF) within the next 12 - 18 months remains the largest challenge for the company. Main concerns in 2013 are cattle availability and oversupply of pork in the U.S. Possible grain price shocks could also pressure costs and profitability, which would hurt the company's ability to deleverage.

JBS' operating profit and cash flow improved in the second half of 2012. Cash Flow from operations (CFFO) improved to BRL1.5 billion in 2012, as compared to BRL607 million in 2011. Negative FCF of BRL147 million during 2012 continued to reflect high capital expenditures of BRL1.6 billion. Net revenues have been on an upward trend in the past five years, fueled by acquisitions and capital investments. EBITDA margins remain between 4% and 7%, which is typical for the industry. In 2012, net revenues of BRL75.7 billion and EBITDA of BRL4.4 billion resulted in an EBITDA margin of 5.8%.

Adequate Liquidity, Reliance on External Financing

JBS has an adequate liquidity position and a manageable 2013 debt maturity schedule, both of which will be improved with the current offering. As of Dec. 31, 2012, cash and marketable securities of BRL5.4 billion covered short-term debt of BRL6.1 billion by 0.9x. As a mitigating factor, about 65% of short-term debt corresponds to trade finance lines that support export activity. The company also needs to maintain about 10% of EBITDA to support its working capital, which was about BRL440 million in 2012. Considering these two adjustments, short-term maturities of long-term debt were covered more than 2.0x by available cash. In addition, the company's JBS USA division has about USD 750.8 million available under its senior secured credit facility and PPC has about USD 572.7 million available under a separate facility.

JBS's maturity schedule for 2014 is heavy with close to BRL4 billion of debt coming due. Fitch projects that JBS's FCF generation will be neutral to slightly positive in 2013, which will continue to make the company dependent upon external financing to address its 2014 maturities.

Solid Business Profile

JBS' credit ratings are supported by a strong business position in the world production of beef, lamb, chicken and pork. The company benefits from geographic and product diversity, which mitigate risks related to disease, the imposition of sanitary restrictions by governments, market concentrations, as well as tariffs or quotas applied regionally by some importing blocs or countries. JBS has plants in 12 Brazilian states and is the most geographically diversified player within this industry in Brazil, as it has operations in the U.S., Canada, Mexico, Argentina, Paraguay, Uruguay, Italy, and Australia. The company is domiciled in Brazil and has a significant footprint in the U.S., with about 66% of its revenues coming from that region, per Fitch's estimates.

Above-Average Industry Risk and Acquisition Profile

The protein industry is volatile and exposed to fluctuations in commodity prices by nature. The company's aggressive attitude toward growth through acquisitions amplifies that risk. While its business profile benefits from improved diversification through past acquisitions, the risk of additional acquisitions remains.

Equity Financing

The credit benefits from the implicit support of the Brazilian development bank's investment arm (BNDESPar), which directly and indirectly holds 23% after it transferred 10.1% in December 2012. The founding family indirectly controls 44% of JBS's shares. The company's ability to finance part of its expansion with equity benefited its capital structure, avoiding peaks in leverage.

RATING SENSITIVITIES

A ratings upgrade could be triggered by a number of factors that include financial improvements significantly above Fitch's expectations, shift of corporate strategy away from acquisition fueled growth and into cash flow generation, and/or sufficient capital injections to meaningfully reduce debt. Rating upgrade is unlikely in the short to medium term.

A downgrade could be precipitated by weakening of the company's financial performance and leverage metrics. Continued negative free cash flow (defined as cash flow from operations less capital expenditures and dividends) beyond current expectations could also result in negative rating actions.

Fitch affirms JBS's ratings as follows:

JBS S.A.:

--Foreign & local currency Issuer Default Rating (IDR) at 'BB-';

--Notes due 2016 at 'BB-';

--National scale rating at 'A-(bra)'.

JBS USA LLC:

--Foreign and local currency IDR at 'BB-';

--Term loan B facility due in 2018 at 'BB'.

JBS USA Finance, Inc:

--Foreign and local currency IDR at 'BB-'.

JBS USA jointly with JBS USA Finance:

--Notes due 2014 at 'BB-';

--Bonds due 2020 at 'BB-';

--Notes due 2021 at 'BB-'.

ESAL GmbH:

--Notes due 2023 at 'BB-';

JBS Finance II Ltd:

--Foreign and local currency IDR at 'BB-';

--Notes due 2018 at 'BB-'.

The Rating Outlook for JBS S.A., JBS USA LLC, JBS USA Finance Inc. and JBS Finance II Ltd is Stable.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012).

--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).

Applicable Criteria and Related Research

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

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Fitch Ratings
Primary Analyst
Viktoria Krane, +1 212-908-0367
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Gisele Paolino, +55 21 4503 2624
Director
or
Committee Chairperson
Dan Kastholm, +1 312-368-2070
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Source: Fitch Ratings

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