Fitch Assigns L-T National Scale Rating of 'BBB+(bra)' to JBS Proposed Bank Credit Facility

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a Long-term National Scale rating of 'BBB+(bra)' to the proposed Bank Credit Facility issuance (CCB) of up to BRL400 million by JBS S.A. (JBS). The proceeds will be used for additional working capital and other goals. Fitch also has the following ratings on JBS:

--Foreign currency Issuer Default Rating (IDR) 'B+';

--Local currency IDR 'B+';

--USD275 million outstanding senior notes (due 2011) 'B+/RR4';

--USD300 million outstanding senior notes (due 2016) 'B+/RR4';

--Long-term National Scale rating of 'BBB+(bra)'.

The Rating Outlook is Stable.

The CCB's ratings are based on the strong and global competitive position of its businesses, the commodity and cyclical risks associated with the meat business, and the company's high financial leverage, resulting from the aggressive growth strategy of its businesses over the past few years. The ratings also incorporate expectations that JBS will maintain its high liquidity position and that its credit measures will gradually strengthen over the next few years as the company begins to consolidate the results of its recent acquisitions of Tasman and Smithfield Beef, which are expected to add at least USD150 million in annual EBITDA in 2009. The probable gains in scale, and greater geographic and product diversification are also expected to provide JBS with greater stability in its cash generation, and less volatility in consolidated operating margins.

JBS benefits from its geographic diversification both domestically, with plants in nine Brazilian states, and internationally, with plants in the United States, Argentina, Italy and Australia. The geographic diversification of its businesses mitigates risks related to disease, the imposition of sanitary restrictions by governments, market concentrations, as well as tariffs or quotas applied regionally by some importing blocs or countries. JBS' businesses are exposed to the volatility of raw material costs, live cattle and local and international beef prices, the imbalance between supply and demand in the protein market, and competitive pressures on the part of other Brazilian or international producers and exporters.

JBS' growth is the result of its aggressive acquisition strategy, which has resulted in numerous domestic and international acquisitions. In October 2008, JBS completed the acquisition of Smithfield Beef in the U.S. for USD565 million in cash, which has been factored into the rating. Despite the challenge of consolidating this new operation, JBS' track record of quickly integrating new operations is strong. The successful consolidation of the Swift (currently JBS USA) acquisition resulted in rapid operating margin improvement. JBS USA margins reached 6% in the third quarter of 2008, after JBS management was able to reduce average fixed cost per head by about USD48; EBITDA margin was negative in the last quarter of 2007.

JBS' capital structure is leveraged with a total-debt-to-EBITDA ratio of 4.4 times (x) and net-debt-to-EBITDA ratio of 2.3x, according to last 12 months (LTM) September 2008 proforma figures. After incorporating the Smithfield Beef acquisition, proforma total-debt-to-EBITDA is 4.2x and net-debt-to-EBITDA ratio is 2.4x. JBS is also in the process of acquiring National Beef Packing Company, LLC (National Beef) in the U.S. for USD560 million, consisting of approximately USD465 million in cash and USD95 million in JBS shares. At the closing the company will assume the debt and other liabilities of National Beef, resulting in an enterprise value of approximately USD970 million. The National Beef transaction is still being analyzed by the U.S. Department of Justice (DOJ). In October 2008, the DOJ filed an action to try to stop the closing of the deal. However, JBS is continuing to pursue the acquisition and the outcome remains uncertain.

Completion of the National Beef acquisition will likely reduce the strong liquidity (cash) position of the company and increase its net debt position. Assuming the National Beef transaction also closes next year, Fitch expects proforma the net-debt-to-EBITDA ratio to increase to approximately 3.4x from 2.4x. Other factors including the timing of the National Beef transaction, its ability to finance a portion of the acquisition and maintain a moderate level of cash liquidity, as well as the roll-over of short-term credit lines, may affect the credit quality of JBS over the near term.

At the end of September 2008, JBS presented BRL4.8 billion of total debt and BRL2.3 billion of cash. JBS' LTM of EBITDA equaled approximately BRL1.1 billion; Smithfield Beef and National Beef will add approximately BRL200 million-BRL300 million each to JBS' EBITDA. About 40% of company's debt is maturing in the short term - mostly trade-related lines of credit, which are supported by its significant level of exports. Over 45% of JBS' debt is denominated in foreign currencies (those different from the currency of the country where the debt was issued), and this entire amount is hedged.

JBS' rapid growth has been financed by a combination of debt and equity, including an Initial Public Offering in April 2007, and a secondary capital increase to acquire Swift (currently JBS USA). In April 2008, the company also completed an equity private placement of USD1.5 billion, to finance the Smithfield Beef and National Beef acquisitions. JBS' strong growth has led to increasing working capital requirements, which coupled with higher capital expenditure has resulted in negative free cash flow generation over the past few years. Fitch would expect free cash flow generation to improve as JBS consolidates its acquisitions, reduces costs and increases productivity. Revenues have increased by six times during the LTM ended on Sept. 30, 2008, versus full-year 2006 results.

As mentioned, JBS' liquidity position is strong and is expected to be used to fund a portion of the recent and pending acquisitions; the amount of the cash used for the acquisition of National Beef will depend on the financial markets. After the Smithfield Beef acquisition liquidity is still strong at approximately BRL2.4 billion. This acquisition totaled USD565 million, and JBS will also disburse an additional USD200 million to capitalize the Five Rivers subsidiary. JBS has historically been successful in rebuilding its cash position with new debt issuances as it completed acquisitions. JBS has been efficient in preserving its cash despite some pressure to repay its short-term debt related to trade finance transactions. In September 2008, this trade finance debt equaled to BRL1 billion.

JBS is the world's largest beef producer, with slaughterhouses in Brazil, the United States, Argentina, Australia and Italy. The company is the largest producer and exporter of fresh meat and meat by-products in Brazil, Argentina and Australia. JBS has just acquired Smithfield Beef and is also in the process of acquiring the operations of National Beef, both in the United States, which include 22 units. Conclusion of the transactions is expected to make it the largest company in the industry in the United States.

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