Fitch Affirms JBS' IDR at 'BB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed JBS S.A.'s (JBS) foreign and local currency Issuer Default Ratings (IDRs) and senior unsecured notes at 'BB+.' Fitch has also affirmed the company's National Scale rating at 'AA+(bra)'.

The Rating Outlook for JBS is Stable.

JBS' 'BB+' rating reflects its strong business profile and Fitch's expectation that the company will deleverage in the next 18 months.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Solid Business Profile:

JBS' ratings are supported by its strong business profile as the world's largest beef and leather producer and its diversification in chicken, beef, pork and prepared food. The company's product and geographic diversification help mitigate risks related to disease and trade restrictions. Fitch estimates that approximately 70% of net revenues are generated from JBS' operations outside Brazil, primarily in the U.S., Australia, Canada and Europe. Exports represented about 28% of group sales in 2Q16.

Challenging Environment:

2016 is a difficult year for the Brazilian protein sector due to the sharp increase in corn prices in the first half of the year, high cattle prices, and weak economic conditions. The strengthening of the Brazilian real in the first half of 2016 and abundant poultry supply have also pressured Seara's exports prices and margins. In 2017, pricing should improve and the company should have more favourable cattle conditions. Asia and the Middle East have remained positive growth drivers during 2016. Fitch expects JBS beef operations in the U.S. to gradually improve its profitably thanks to increased cattle availability and demand for exports. JBS' pork business remains solid, and low grain prices in the U.S. should continue to support profitability in the company's U.S. chicken division.

High Leverage:

Fitch expects JBS' ratio of net debt/EBITDA adjusted for dividends paid to minorities to peak at about 4.7x by the end of 2016 from 3.9x in 2015. 2016 results were not only hurt by weak cash flow but also by dividends and share buybacks totalling BRL2.5 billion in 1H16. JBS also registered a net loss on derivatives of about BRL6 billion as the company unwound its hedging position related to FX position in 1H16. Fitch expects net leverage ratios to move toward 3.5x in 2017, which is in line with the rating level, due to improved profitability at Seara and JBS USA beef.

U.S. Listing and Acquisitions:

In its base case, Fitch does not factor any large debt-financed acquisition over the next 18 months, as JBS management aims to list the group on the NYSE and is focused on deleveraging the company after having spent about BRL15.5 billion in acquisitions in 2015. Nevertheless, acquisition risk in the medium term is above average, as Fitch expects the company to continue to pursue inorganic growth. The proposed reorganization entails a transfer of JBS S.A.'s assets, excluding the Brazil beef and leather operations and other activities (i.e. biodiesel, collagen, carrier businesses), to a new holding company called JBS Foods International. The bonds at JBS SA will be transferred to a newly created holdco registered in Europe. Post-reorganization, the company will report its financials in U.S. dollar. An aim of the reorganization is to lower the company's cost of capital. Fitch sees this reorganization (as currently proposed) as neutral for the ratings.

KEY ASSUMPTIONS

--High single digit revenues growth thanks to the acquisitions made in 2015;

--EBITDA margin reduction because of higher raw material costs and the strengthening of the real against the U.S. dollar;

--Net debt/ EBITDA (including dividends paid to minorities) moving toward 3.5x in 2017.

RATING SENSITIVITIES

A downgrade could be precipitated by an increase in JBS' net debt/EBITDA (post dividends to minorities) above 3.5x-4.0x on a sustained basis due to a sharp contraction of its operating margins, negative FCF generation, and/or significant debt-funded acquisitions.

An upgrade could result from the company's consistent positive FCF generation and resilience of its operating margins, backed by business diversification, leading to its net leverage ratio falling toward or below 2.5x on a sustained basis.

LIQUIDITY

JBS liquidity is supported by its cash balance and committed undrawn bank lines. As of June 30, 2016, the company had BRL8.5 billion of cash and cash equivalent and short-term debt of BRL18.4 billion (mostly trade finance debt). Also, JBS USA had USD1.4 billion fully committed available lines. Fitch expects JBS to report neutral to negative FCF in 2016 because of lower EBITDA due to pressure in raw material costs and the subdued performance of the U.S. Beef business in 1H16.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

JBS S.A.:

--Foreign & local currency IDR at 'BB+';

--National Scale rating at 'AA+ (bra)'.

JBS USA Lux S.A.:

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

--Term loan B facility due in 2018 to 'BBB-';

--Notes due 2020, 2021 at 'BB+'.

JBS USA Finance, Inc:

--Notes due 2020, 2021 at 'BB+'.

JBS Investments GmbH

--Notes due 2020, 2023, 2024 at 'BB+'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

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=1013006

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013006

Endorsement Policy
https://www.fitchratings.com/regulatory

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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:
Joseph Bormann, CFA, +1-312-368-3349
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
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elizabeth.fogerty@fitchratings.com

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:
Joseph Bormann, CFA, +1-312-368-3349
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com