Fitch Affirms BRF's IDR at 'BBB-'; Upgrades Nat'l Rating to 'AA+(bra)'

NEW YORK--()--Fitch Ratings has affirmed BRF S.A.'s (BRF) Issuer Default Rating (IDR) and senior unsecured notes at 'BBB-'with a Stable Outlook. Fitch has simultaneously upgraded BRF's national rating to 'AA+(bra)' from 'AA(bra)' with a Stable Outlook. The upgrade of the company's national rating reflects BRF's rapid deleveraging and strong free cash flow (FCF) generation.

A complete list of BRF's current ratings follows at the end of this release.

KEY RATING DRIVERS

Strong Business Profile:

BRF S.A. (BRF) is one of Brazil's largest food companies and the largest poultry exporter worldwide. The company has market shares in the range of 50%-60% in most of its domestic product segments. While entry barriers to the processed food segment are relatively low, BRF benefits from its extensive product offering, strong brand recognition, recurring innovation, and extensive distribution capacity for refrigerated products in Brazil.

Strong Cash Generation:

Fitch expects BRF to generate more than BRL1.5 billion of FCF after interests and dividends in 2014 due to solid EBITDA growth and improved working capital management. Fitch assumes capex will be around BRL1.5 billion in FY14. During the second quarter of 2014, BRF reported a 13% EBITDA margin, which is a significant improvement from 10.3% in 2013.

Improving Profitability:

BRF has completed many streamlining initiatives that will reduce costs and increase operating efficiencies. These measures included reducing management layers and significantly reducing the number of SKUs destined for the domestic market. To enhance revenues, BRF is rolling out its go-to-market (GTM) strategy in its domestic market by expanding the number of points of sale and launching new products and marketing campaigns to increase sales and brand awareness.

Event Risks Remain:

While Fitch expects BRF to focus on improving efficiency and securing its market share in Brazil, more acquisitions might occur. In 2014, BRF announced a few transactions in the Middle East. BRF acquired 100% of Federal Foods' economic rights (USD27.8 million for the remaining rights) and 40% of Al Khan Foods LLC (enterprise value of USD68.5 million) and made a binding offer for a 75% stake of Alyasra Food Company W.L.L. (enterprise value of USD160 million). BRF also is considering strategic alternatives for its dairy division, forming partnerships, and/or selling assets to third parties in the short term.

Improved Credit Metrics:

In light of the strong FCF generation projected in 2014, Fitch expects BRF's net leverage to decrease toward or below 1.5x in 2014. The projection does not include any major divestments or acquisitions. BRF's rating headroom is strong for the 'BBB-' and 'AA+(bra)' ratings; however, Fitch believes that the company will leverage up through acquisitions or additional cash disbursements to shareholders in the near- to medium-term in order to be in line with its stated financial policy of 2.0x net leverage.

RATING SENSITIVITIES

A rating downgrade could be triggered by a substantial deterioration in BRF's operating margins and FCF generation. This, coupled with market share erosion beyond anticipated levels from competitive pressures and/or a net leverage increase of above 3.0x (3.5x on gross) from a large debt-financed acquisition, could result in negative rating actions.

An upgrade could occur if BRF continues to maintain strong FCF generation and market share in Brazil. A more conservative stated financial policy or continued gross leverage in the range of 2.5x-3.0x (or 1.5x-2.0x on a net basis) would be viewed positively.

Fitch has affirmed BRF as follows:

--Foreign & local currency IDR at 'BBB-';

--Notes due 2018, 2022, 2023, 2024 at 'BBB-';

--Notes due 2020 issued by BFF International Ltd. and guaranteed by BRF and Sadia at 'BBB-';

--Notes due 2017 issued by Sadia Overseas Ltd. and guaranteed by BRF at 'BBB-'.

In addition, Fitch has upgraded BRF's national rating to 'AA+ (bra)' from 'AA(bra)'.

The Rating Outlook is Stable

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=849654

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Contacts

Fitch Ratings
Primary Analyst
Johnny Da Silva, +1 212-908-0367
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Gisele Paolino, +55 21 4503 2624
Director
or
Committee Chairperson
Joe Bormann, CFA, +1 312-368-3349
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Johnny Da Silva, +1 212-908-0367
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Gisele Paolino, +55 21 4503 2624
Director
or
Committee Chairperson
Joe Bormann, CFA, +1 312-368-3349
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com