Fitch Affirms Minerva's Ratings at 'BB-'

NEW YORK--()--Fitch Ratings has affirmed the international ratings of Minerva S.A. (Minerva) at 'BB-' with a Stable Outlook.

Fitch has also affirmed and withdrawn Minerva Luxembourg S.A Issuer Default Ratings (IDRs) because it is a special purpose company and its ratings are no longer considered by Fitch to be relevant to the agency's coverage.

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

KEY RATING DRIVERS:

Industry Fundamentals

The fundamentals of the Brazilian beef industry remain positive due to the low cost structure, potential productivity gains and revenue momentum derived from strong international demand, which accounts for around 70% of Minerva's sales. In July 2014, China removed its embargo of Brazilian beef, which will benefit companies such as Minerva that have export capacity. This positive trend is mitigated by high cattle prices and the slowdown of the Brazilian economy. Therefore, Fitch expects more pressure on the EBITDA margin in 2015 for the main players in the industry.

Expansion-Oriented:

Minerva completed several bolt-on acquisitions that will increase its production capacity by about 38% and improve operating cash flow in 2015. In early 2014, the company acquired a slaughterhouse in Janauba, Minas Gerais, for BRL40 million and concluded the acquisition of Frigorifico Matadero Carrasco S.A. in Uruguay for USD37 million. Minerva is also acquiring two plants from BRF in Mato Grosso State through an equity financed transaction that will result in BRF (IDR 'BBB-'/Stable Outlook) having a 15.2% stake in Minerva and two board members.

Strong Growth Due to Several Factors:

Minerva reported improving revenues and EBITDA in second-quarter 2014. Minerva's net revenue reached BRL1.7 billion, which is 25% higher than in the second-quarter of 2013. During the same period, Minerva's EBITDA increased 33% year over year. LTM EBITDA margins for the period ended June 30, 2014 was 10.9%, up 20 bps over the same period in 2013. This growth was fueled by the aforementioned expansion. Minerva also enjoyed strong beef price increases in the domestic market. During the second-quarter 2014, export market revenues increased by 28% year over year.

Improved Credit Metrics:

Fitch expects Minerva's free cash flow to be negative in 2014 due to recent acquisitions but its net debt to EBITDA ratio to decease to below 3x by 2015 (3.4x in FYE13) due to the ramp-up of profitability from the new plants acquired.

Product, Country Concentration Risks:

Minerva is less diversified from a product and geographic position than two other large protein companies based in Brazil, JBS S.A. and Marfrig S.A. Minerva's operations are highly focused on beef production. With its large export presence, the company's profitability is also closely tied to the exchange rate variations. Among the significant risks faced by the company are a downturn in the economy of a given export market, the imposition of increased tariffs or commercial or sanitary barriers, and strikes or other events that may affect the availability of ports and transportation.

RATING SENSITIVITIES

The rating is considered solid to strong in the category. A negative rating action could occur as a result of a sharp contraction of the Minerva's performance, increased net leverage as a result of either a large debt-financed acquisition or asset purchases, or as a result of a severe operational deterioration due to disruptions in exports.

A positive rating action could be triggered by additional geographic and protein diversification and/or a material decrease in gross and net leverage.

Fitch has taken the following rating actions:

Minerva S.A.:

--Local Currency IDR affirmed at 'BB-';

--Foreign currency IDR affirmed at 'BB-';

--National scale rating affirmed at 'A-(bra)'.

Minerva Luxembourg S.A.:

--Local currency IDR affirmed and withdrawn at 'BB-';

--Foreign currency IDR affirmed and withdrawn at 'BB-';

--Senior unsecured notes due in 2017, 2019, 2022 and 2023 affirmed at 'BB-';

--Perpetual notes affirmed at 'BB-'.

The Rating Outlook for the corporate ratings 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=888334

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