Fitch Affirms BRF at 'BBB'; Outlook Negative

NEW YORK--()--Fitch Ratings has affirmed BRF S.A.'s (BRF) Long-Term Foreign Currency Issuer Default Rating (IDR) and senior unsecured notes at 'BBB' with a Negative Outlook. Fitch has also affirmed BRF's Long-Term Local Currency IDR at 'BBB' and national rating at 'AAA(bra)' with a Stable Outlook. A full list of ratings follows at the end this release.

The affirmation of the ratings reflects the company's strong business profile and adequate leverage.

KEY RATING DRIVERS

Strong Business Profile:

BRF is one of Brazil's largest food companies and is also one of the largest poultry exporters worldwide. The company benefits from strong domestic brands that have given the company market shares that range between 50% and 60% in many market 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. The company's business profile benefits from geographic diversification with approximately 58% of its sales occurring outside of Brazil.

Reduced Profitability:

Fitch expects a contraction of BRF's EBITDA margin in 2016 due to increased raw materials costs and the economic downturn in Brazil. In the first half of 2016 (1H16; June 30, 2016), the market price of corn and soybean meal increased by 83% and 20%, respectively, year-over-year in Brazil. As a result, BRF's EBITDA margin decreased to 11.8% from 15.6% in 1H15. Fitch expects the company to gradually improve profitability thanks to price increases, volume growth in international markets and a reduction of cost pressure going forward. As of 1H16, the company's average prices increased by 6.9% compared to 1H15.

Bolt-On Acquisitions:

Fitch expects BRF to continue to pursue bolt-on acquisitions to expand internationally. As of 1H16, the company spent BRL2.8 billion on inorganic expansion. Acquisitions completed in recent years include GFS in Thailand, Campo Austral and Calchaqui in Argentina, Universal Meats in the United Kingdom, AKF in Oman, and QNIE's frozen distribution business in Qatar. These transactions have enhanced BRF's strong business profile and reduced its exposure to Brazil.

Leverage and Rating:

Fitch expects BRF's net leverage to increase to around 2.5x in fiscal year-end 2016 (FYE16) from 1.5x in FYE15 due to lower EBITDA margins, acquisitions and share buyback. Fitch's EBITDA excludes BRL11 million of interest on shareholders' equity received. Fitch expects BRF's free cash flow (FCF) and leverage to gradually recover in 2017 as raw material cost pressure abates and the company's operating results will fully benefit from the assets acquired in 2016. Fitch rates BRF above Brazil's country ceiling of 'BB+' as the company benefits from hard currencies revenues from exports revenues, cash abroad and undrawn committed bank lines in foreign currency.

KEY ASSUMPTIONS

--High single-digit revenue growth due to the subdued economic environment in Brazil, but a positive impact from export market;

--Decrease in EBITDA margin due to raw material cost increase;

--Net debt to EBITDA below 2.8x.

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 2.8x from a large debt-financed acquisition, could result in negative rating actions. A further downgrade of Brazil would put pressure on BRF's ratings.

An upgrade is unlikely given Brazil's country ceiling rating of 'BB+'. However, a more conservative stated financial policy established by management regarding cash return to shareholders and credit would be viewed positively.

LIQUIDITY

BRF's liquidity remains strong and supports the company's solid credit profile. As of June 30, 2016, BRF had BRL4.6 billion of cash and cash equivalents and BRL3.7 billion and short-term debt. Around 28% of debt is short term. Approximately 59% of total debt is foreign currency denominated. BRF has an undrawn revolving credit facility of USD1 billion due in 2019.

FULL LIST OF RATING ACTIONS

Fitch affirms BRF ratings as follows:

BRF S.A.:

--Foreign Currency Long-Term Issuer Default Rating (IDR) at 'BBB'; Outlook Negative;

--Local Currency Long-Term IDR at 'BBB'; Outlook Stable;

--National scale rating at 'AAA(bra)'; Outlook Stable;

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

BFF International Ltd 'BBB';

--Senior unsecured notes due 2020 guaranteed by BRF S.A. at 'BBB'.

BRF GmbH:

--Senior unsecured notes due in 2026 at 'BBB'.

Sadia Overseas Ltd

--Senior unsecured notes due in 2017 at 'BBB'.

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

Applicable Criteria

Country Ceilings (pub. 16 Aug 2016)

https://www.fitchratings.com/site/re/885997

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Rating Non-Financial Corporates Above the Country Ceiling (pub. 21 Jun 2016)

https://www.fitchratings.com/site/re/882817

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012695

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012695

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Johnny da Silva
Director
+1-212-908-0367
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gisele Paolino
Director
+55-21-4503-2625
or
Committee Chairperson
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Johnny da Silva
Director
+1-212-908-0367
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gisele Paolino
Director
+55-21-4503-2625
or
Committee Chairperson
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com