Fitch Upgrades JBS' Ratings to 'BB'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded JBS S.A.'s (JBS) foreign and local currency Issuer Default Ratings (IDR) and senior unsecured notes to 'BB' from 'BB-'.

Fitch has also affirmed and withdrawn the IDRs of JBS Finance II Ltd. and JBS USA Finance Inc. Both are special purpose companies, and Fitch no longer considers their ratings to be relevant to the agency's coverage.

The Rating Outlook is Stable. A full list of JBS' ratings follows at the end of this release.

The upgrade reflects JBS' improved business profile following its successful integration of Seara Brazil (Seara), whose well-branded and less volatile operation has enhanced JBS' business portfolio. The upgrade also reflects the company's strong products and geographical diversification, as well as the successful integration of several businesses over the past few years. Fitch expects the company to report strong performance in all of its divisions in 2014 and 2015. JBS' ratings are tempered by its acquisition appetite for growth.

KEY RATING DRIVERS

Solid Business Profile:

JBS' ratings are supported by its strong business profile as the world's largest beef and leather producer. With the acquisition of Seara from Marfrig Alimentos S.A. (Marfrig) in 2013, JBS became the second-largest producer of processed meats in Brazil. The company's product and geographic diversification help mitigate risks related to disease and trade restrictions.

Industry Fundamentals:

The fundamentals of the Brazilian beef industry remain positive due to the low cost structure, potential productivity gains and revenue growth momentum derived from strong international demand. In addition, in July 2014, China removed its embargo of Brazilian beef, which will benefit exports. This positive trend, however, is somewhat offset by high cattle prices, the slowdown of the Brazilian economy, and an abundant cattle herd that is reaching peak levels. This could pressure EBITDA margin of the main players in the industry during 2015. The USA beef industry remains difficult due to the shortage of the cattle herd but the shutdown of industry capacity is gradually improving companies' profitability.

Moderate Leverage:

Fitch expects JBS' net debt-to-EBITDA ratio to organically fall to below 3.0x by the end of 2014 due to its strong EBITDA improvement and positive FCF generation. Given the acquisitive nature of the company, Fitch has built in an expectation of debt-financed acquisitions that could potentially increase the company's leverage ratio. Nevertheless, JBS' leverage should remain in line with the 'BB' rating category.

Solid Performance:

JBS has reported strong sales and EBITDA growth during 2Q'14. Its net revenues increased by 32.1% to BRL29 billion, and its EBITDA increased by 45.9% versus 2Q'13. The company's strong performance is due to an improvement in revenues from all business units, except for the U.S. chicken operations (Pilgrim's Pride), which remained stable. The Seara acquisition also contributed to growth. Fitch expects the recent decline of commodity prices, notably corn price to be supportive to the group's overall profitability in 2015.

Acquisition Risk:

Considering JBS' acquisitions history, Fitch believes that the company will continue to pursue growth opportunities to strengthen its business profile. The group made a failed attempt to buy Hillshire brands company through an initial bid at USD6.4 billion in May 2014. Subsequently, JBS announced the acquisition of Tyson Foods, Inc.'s poultry businesses in Brazil (USD175million) and Mexico (USD400 million) and assets of Ceu Azul in Brazil (BRL246 million). Some of these acquisitions are depending upon the final approval from CADE, the Brazilian antitrust authority.

RATING SENSITIVITIES

A downgrade could be precipitated by an increase in JBS' net leverage ratio above 4x-4.5x on a sustained basis due to a sharp contraction of its operating margins, negative FCF generation, and/or a 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 towards or below 2.5x on a sustained basis.

Fitch has taken the following rating actions:

JBS S.A.:

--Foreign & local currency IDR upgraded to 'BB' from 'BB-';

--National scale rating upgraded to 'A+ (bra)' from 'A-(bra)';

--Notes due 2016 upgraded to 'BB' from 'BB-';

--Debentures upgraded to 'A+(bra)' from 'A-(bra)'.

JBS USA LLC:

--Foreign and local currency IDR upgraded to 'BB' from 'BB-';

--Term loan B facility due in 2018 upgraded to 'BB+' from 'BB';

--Notes due 2020, 2021 upgraded to 'BB' from 'BB-'.

JBS USA Finance, Inc:

--Foreign and local currency IDR upgraded to 'BB' and withdrawn;

--Notes due 2020, 2021 upgraded to 'BB' from 'BB-'.

JBS Investments GmbH

-Notes due 2020, 2023, 2024 upgraded to 'BB' from 'BB-'.

JBS Finance II Ltd:

--Foreign and local currency IDR upgraded to 'BB' and withdrawn;

--Notes due 2018 upgraded to 'BB' from 'BB-'.

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=889394

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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
Joe 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 St.
New York, NY 10004
or
Secondary Analyst
Gisele Paolino
Director
+55 21 4503 2624
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com