Fitch Upgrades Marfrig's IDR to 'BB-'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has upgraded Marfrig Global Foods S.A.'s (Marfrig) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'BB-' from 'B+' and its National Scale rating to 'A(bra)' from 'BBB+(bra)'. Fitch has also upgraded to 'BB-' from 'B+' Marfrig's senior unsecured notes and the IDR of Marfrig Holdings (Europe) B.V. Fitch has withdrawn the FC IDR of Marfrig Holding (Europe) B.V.

The Rating Outlooks for Marfrig and Marfrig Holdings (Europe) B.V. were revised to Stable from Positive.

The upgrade reflects a combination of decreased leverage and improved liquidity due to the sale of Moy Park during 2015 for USD1.5 billion, lower refinancing risk and interest expenses as a result of liability management steps taken by the company during 2016, and the expectation that free cash flow will improve materially in 2018 following the conversion of the company's mandatory convertible notes, which will lower interest expenses by BRL280 million, and an improvement in the beef fundamentals in Brazil.

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

KEY RATING DRIVERS

Positive FCF

Fitch expects Marfrig's free cash flow to be slightly positive in 2016 improving to BRL400 million in 2017. Factors driving the improvement will be lower overall interest expenses due to refinancing, interest savings from the mandatory debt conversion to equity, and improved margins in the Brazilian beef sector as a result of an increase in the availability of cattle. Keystone continues to report improved EBITDA margin and solid growth fuelled by its international operations in Asia and low grain prices in the U.S.

Favorable Business Profile

Marfrig's ratings continue to incorporate its broad product and geographic diversification, which help to reduce risks related to disease, trade restrictions and currency fluctuation. The company is structured into two business units. Marfrig Beef (58% of EBITDA in 2015) is one of the world's largest beef producers, and Keystone Foods (42% of EBITDA in 2015) is a global supplier to foodservice restaurants chains (McDonald's represents about 58% of sales).

Challenging 2016

The appreciated Brazilian real against the U.S. dollar, the weak consumer environment in Brazil, and the high cost of cattle in that market made 2016 challenging for companies in the Brazilian protein sector. The industry is adjusting to this environment by reducing capacity in an effort to improve utilization rates. Prices have also been increasing to offset the high cost faced by protein companies. The price adjustments should drive gradual recovery in margin in 2017. Positively, Brazilian beef producers continue to gain access to more export markets.

No Major Acquisitions Anticipated

Fitch does not foresee any major acquisitions for Marfrig over the next 12 months. The company's management is focused on deleveraging its balance sheet, improving free cash flow generation and reducing interest expense. Key initiatives will be the optimization of plants and distribution by Marfrig Beef and the geographic expansion of Keystone while reducing interest expenses.

KEY ASSUMPTIONS

--Total revenues of about BRL19 billion in 2016;

--EBITDA margin stabilized at around 9%;

--Steady capex in 2016 compared to 2015;

--Cash interest paid reduction of BRL280 million after 2018 reflecting the conversion of the debentures in January 2017;

--Net debt/EBITDA below 3x by 2018.

RATING SENSITIVITIES

A downgrade could be precipitated by Marfrig's inability to improve FCF over the next 24 months and maintain net leverage above 5.0x on a sustainable basis.

An upgrade could result from a track record of generating positive FCF, demonstrating the resilience of its group's operating margin in its Beef business in Brazil and substantial decrease in gross and net leverage to below 4.5x and 3.0x, respectively, on a sustained basis.

LIQUIDITY

Marfrig's liquidity is strong after its recent divestment cycle. As of June 2016, the group held BRL5.1 billion of cash and marketable securities compared with short-term debt of BRL2 billion. The company continues actively engaged in liability management to reduce debt and interest expense. In the first half of 2016, Marfrig issued USD1 billion to repurchase senior unsecured notes due 2016, 2017, 2018 and 2020. Around 95% of the company's debt is in U.S. dollars and foreign currencies (excluding real) while 76% of its EBITDA is pegged to currencies other than the BRL.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the following ratings:

Marfrig Global Foods S.A.:

--Long-Term Foreign and Local Currency IDRs to 'BB-' from 'B+'; Outlook to Stable from Positive.

--Long-Term National Scale rating to 'A(bra)' from 'BBB+(bra)'. Outlook to Stable from Positive.

Marfrig Overseas Ltd:

--Notes due 2016, 2020 to 'BB-' from 'B+/RR4'.

Marfrig Holdings (Europe) B.V.:

--Notes due 2018, 2019, 2021, 2023 to 'BB-' from 'B+/RR4'.

In addition, Fitch has upgraded and withdrawn the following rating:

Marfrig Holdings (Europe) B.V.:

--Long-Term Foreign Currency IDR to 'BB-' from 'B+'; Outlook to Stable from Positive.

The rating was withdrawn as this entity is no longer considered analytically meaningful to the credit quality of the notes it has issued. Notes issued by this special purpose entity were fully guaranteed by Marfrig, and the ratings of those issuances remain outstanding.

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

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/site/re/879564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013184

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013184

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Johnny Da Silva
Director
+1-212-908-0367
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Gisele Paolino
Director
+55 21 4503 2624
or
Committee Chairperson
Dan Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com