Fitch Rates BRF's Proposed Senior Unsecured Notes 'BBB-'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB-(exp)' rating to the proposed benchmark-size senior unsecured notes to be issued by BRF S.A (BRF). These proposed senior unsecured notes will rank equally with all of BRF's existing and future senior and unsecured indebtedness. The proceeds of the bond will support investments in sustainable projects of the company.

KEY RATING DRIVERS

Strong Business Profile:

BRF is one of Brazil's largest food companies and the largest poultry exporter worldwide. The company has market shares in the range of 50%-60% in most of its domestic product 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 benefits from its exposure to export market (46.2% of total sales are outside Brazil), notably in Asia, Europe and Middle East.

Strong Cash Generation:

Fitch expects BRF to generate strong positive free cash flow (FCF) in 2015. The group reported FCF of BRL2.5 billion at fiscal year-end (FYE) 2014. During the first quarter of 2015 (1Q15), BRF reported a strong increase in cash flow from operation of BRL1.5 billion compared to BRL952 million in 2013 due to an improvement in group EBITDA margin which reached 13.5% (12.8% in 1Q14). This was the result of better average prices in all regions (LATAM, Middle East and Asia) in international markets, low commodity costs and good working capital management, notably in accounts payable where the company renegotiated most of its contracts with suppliers.

Improving Profitability:

Fitch expects BRF to post strong operating performance despite the subdued consumer environment in Brazil (higher interest rates, inflation and unemployment) and instability seen in important markets such as Venezuela, Russia and Angola. Domestically, BRF is implementing many streamlining initiatives that will increase operating efficiencies. These measures include decentralizing decisions by splitting Brazil into five regional administrative areas, developing a new pricing model, pursuing its go-to-market (GTM) strategy by expanding the number of points of sale and launching new marketing campaigns and products (including Perdigao's new categories) to increase brand awareness, and accelerating the automation processes of its plants.

Bolt-on Acquisitions:

Fitch expects BRF to purse bolt-on acquisitions in order to expand internationally. BRF announced the creation of a joint venture with Singapore Food Industries (SFI) in April 2015 for the production and distribution of processed food in Singapore. BRF will invest USD19 million. BRF also announced the creation of a JV with Invicta Food Group Limited, which will be focused on the distribution of processed food in the United Kingdom, Ireland and Scandinavia. BRF will invest GBP18 million.

Strong Credit Metrics:

Fitch expects BRF's net leverage to remain near 0.5x in 2015 (1.26x as of 1Q15) depending on dividends and share buybacks. In 1Q15, the company paid out BRL463million for dividends and BRL1 billion for share buybacks.

BRF's rating headroom is strong for the 'BBB-' and 'AA+ (bra)' ratings; however, Fitch believes that the company will leverage up through acquisitions or additional cash disbursements to shareholders in the near- to medium-term.

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;

--Strong FCF of at least BRL2.4 billion.

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 3.0x (3.5x on gross) 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 financial policy regarding cash return to shareholders and credit metrics or continued gross leverage in the range of 2.5x-3.0x (or 1.5x-2.0x on a net basis) on a sustainable basis would be viewed positively.

Fitch currently rates BRF as follows:

BRF S.A.

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

--National scale rating 'AA+(bra)';

--Notes due 2018, 2022, 2023, 2024 'BBB-'.

Sadia Overseas Ltd.

--Senior Unsecured notes due 2017 guaranteed by BFR S.A.

BFF International Ltd.

--Senior Unsecured notes due 2020 guaranteed by BRF S.A.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage [749393 - 28-MAY-2014] (pub. 28 May 2014)

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

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

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985542

Endorsement Policy

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

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150529005563/en/

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
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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