Fitch Upgrades BRF's Ratings to 'BBB'; Outlook Stable

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

In addition, the National Rating has been upgraded to 'AAA(bra)' from 'AA+(bra)'. The Rating Outlook is Stable. A full list of BRF's ratings follows at the end of this release.

The upgrades reflect the significant progress the company has made in cutting cost and increasing the strength of its brands, which has enhanced its free cash flow generation and strengthened credit metrics.

KEY RATING DRIVERS

Strong Business Profile

BRF S.A. (BRF) is one of Brazil's largest food companies and one of the largest poultry exporter worldwide. The company's cash flow benefits from strong domestic brands that have given the company market shares that range between 50% and 60% in many market segments. While entry barriers to the processed food segment are relatively low, BRF benefits from its extensive product offering, strong brand recognition, recurring innovation and extensive distribution capacity for refrigerated products in Brazil. The company's business profile benefits from its geographical diversification with approximately 50% of its sales occurring outside of Brazil.

Strong Cash Generation

Fitch expects BRF's free cash flow (FCF) to remain strong during 2015 at approximately BRL2 billion. This will result in a continuation of a trend that accelerated in 2014 as the company's FCF grew to BRL2.5 billion from about BRL0.9 billion the prior year. Key drivers of the company's strong FCF were the strong performance in international markets, better average prices in all regions - most notably the Middle East and Asia, lower grain input costs and good working capital management.

Improving Profitability

BRF's margins are projected to continue to improve in 2015 due to its strong performance in exports markets thanks to the weak Real against U.S. dollar and improvements in distribution in those markets. Challenges will continue to be faced in Brazil due to higher interest rates, inflation and unemployment. Domestically, BRF is implementing many streamlining initiatives to confront its anaemic market. These measures include decentralizing management decisions by splitting Brazil into five regional administrative areas, developing new pricing models, expanding the number of points of sale, launching marketing campaigns and products (including Perdigao's new categories) to increase brand awareness, and accelerating the automation processes of its plant. During 2014, BRF's EBITDA margins expanded to 16% from 10% during the prior year.

Event Risks Remain

While Fitch expects BRF to focus on improving efficiency and securing its market share in Brazil, more acquisitions might occur outside Brazil to fuel revenues growth. Over the last two years, BRF has made several bolt-on acquisitions and established joint ventures to reinforce its distribution capacity and improve its pricing power in its exports markets. Fitch expects BRF to continue pursuing bolt-on acquisitions to expand its businesses internationally.

Strong Credit Metrics and Liquidity

BRF had BRL4.6 billion of cash and cash equivalents and BRL2.1bn of short-term debt as of June 30, 2015. This does not include proceeds from the divestment of its dairy product division to Lactalis for a total amount of BRL2.1 billion during July 2015. Due to strong FCF generation, Fitch expects BRF's net leverage to be below 1x in 2015. The expectation does not include any transformational acquisitions but does include additional cash returns to shareholders. BRF rating headroom remains strong but Fitch believes that the company will leverage up through acquisitions or additional cash disbursements to shareholders. As of June 2015, the company repurchased BRL1.3 billion of its owned shares.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for BRF S.A.

--High single-digit revenue growth due to the subdued economic environment in Brazil, but a positive impact from export market and weak Real;

--Slight improvement of EBITDA margin thanks to low grain price and operating efficiency measures;

--Net debt to EBITDA below 1x.

RATING SENSITIVITIES

A rating downgrade could be triggered by a substantial deterioration in BRF's operating margins and FCF generation. This, coupled with market share erosion beyond anticipated levels from competitive pressures and/or a net leverage increase of above 2.75x from a large debt-financed acquisition, could result in negative rating actions.

An upgrade could occur if BRF continues to maintain strong profitability and market share in Brazil. A more conservative stated financial policy established by management regarding cash return to shareholders and credit metrics or continued leverage in the range 1.5x on a net basis on a sustainable basis would be viewed positively.

Fitch upgrades the following ratings:

BRF S.A.

--Foreign & local currency Issuer Default Rating to 'BBB' from 'BBB-';

--National scale rating to 'AAA (bra)' from 'AA+(bra)';

--Notes due 2018, 2022, 2023, 2024 to 'BBB' from

'BBB-'.

Sadia Overseas Ltd.

--Senior Unsecured notes due 2017 guaranteed by BFR S.A. to 'BBB' from 'BBB-'

BFF International Ltd.

--Senior Unsecured notes due 2020 guaranteed by BRF S.A. to 'BBB' from 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989175

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989175

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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
Ricardo Carvalho
+55 21 4503 2627
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@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
Ricardo Carvalho
+55 21 4503 2627
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com