Moody's assigns Baa3 foreign currency rating to BRF's proposed issuance of US$500M 10-year senior unsecured notes; outlook stable
May 15, 2014
– Moody's Investors Service has assigned a Baa3 foreign currency rating to BRF's proposed issuance of USD 500 million 10-year senior unsecured notes. Net proceeds from the transaction will be used to tender part of outstanding notes. The ratings outlook is stable.
Issuer: BRF S.A.
USD 500 million senior unsecured notes due 2024: Baa3 (global scale)
The outlook for the ratings is stable.
The Baa3 rating reflects Brasil Foods' good business profile, solid financial position and leadership both in relevant processed food categories and in global poultry exports. BRF's well positioned brands improve margin stability, and makes the company more resilient to commodity price volatility. Brasil Foods also has a well-developed logistics and distribution structure that manages the supply chain from the vertically integrated farmers network to the delivery of its products to about 150 thousand customers per month across virtually all of the large Brazilian territory.
Offsetting some of its positive attributes, the rating takes into consideration BRF's exposure to grain prices and currency volatility, since approximately half of its sales still come from in natura meat and 40% from the export markets. These risks are partially mitigated by the use of hedging strategies in its operations.
Recent changes in organizational structure to convey a shift in focus from a product oriented company to a consumer oriented one, with concurrent roll-out of a new strategic plan for the 2014-2017 period, could lead to improvements in business profile and profitability, but also entail some amount of execution risk. The revised business plan, which the company estimates will improve operating margins by BRL 1.9 billion by 2016, includes a number of initiatives to improve performance and efficiency in the domestic market and expand food service operations in international markets. Although Moody's recognizes expansion as a key component of product and geographic diversification, large debt-financed acquisitions could add integration and financial risks to BRF.
The proposed deal is part of BRF's liability management strategy and proceeds from the transaction will be used to tender part of the company's outstanding notes, thus improving the company's liquidity profile and lengthening its amortization schedule. The rating of the notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and assume that these agreements are legally valid, binding and enforceable.
The stable outlook reflects our view that BRF will continue to profit from its solid business model and position as one of the largest food conglomerates in the world. It also incorporates expectations that its expansion strategy will be conducted in a prudent and conservative manner and will not jeopardize its strong credit metrics and liquidity.
The ratings could be upgraded if the company further increases the proportion of processed products in its portfolio to above 70% of total sales and sustain a positive free cash flow generation. A total debt to EBITDA below 2.0x and an EBITA/interest expense of 5.0x or higher on a sustainable basis would also be important considerations for positive rating momentum.
A downgrade could result from the inability to deliver at least mid-single digit organic growth rates and double digit EBITDA margins on a sustainable basis. In addition, debt/EBITDA above 3.0x, EBITA/interest expense of 3.0x or less and CFO/net debt below 30% on a sustained basis could trigger a downgrade. A deterioration in its liquidity profile could also prompt a negative rating action.
The principal methodology used in this rating was Global Protein and Agriculture Industry published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
BRF S.A. is one of largest food conglomerates globally, with consolidated net revenues of BRL 30.7 billion in the LTM ending March 2014. Processed food, which typically generates higher and less volatile margins than the protein export business, represented 40.5% of net sales in 2013. The company operates 60 plants and 30 distribution centers, exports to more than 110 countries and is one of the world's largest protein producers, with a leading position in poultry exports.