Fitch Affirms Minerva at 'BB-'; Outlook Stable

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

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

KEY RATING DRIVERS

Industry Fundamentals:

Fitch expects 2015 to be a more difficult year for the Brazilian protein sector due to the weak economic environment, high inflation, increased interest and unemployment rates, and declining consumer confidence. As a result, the industry is reducing processing capacity. Exporters benefit from the depreciation of the real and the growing demand for beef worldwide. Asia and the Middle East remain the positive growth drivers. Minerva S.A. (Minerva) generates 66% of revenues from exports markets. In May 2015, mainland China approved Brazilian beef imports and in June 2015 the United States announced the beginning of the opening process. Also the European Union opened its market to the Paraguayan fresh beef, and Saudi Arabia is reopening imports of Brazil's fresh beef.

Lower Investments:

Fitch expects Minerva's capex to decrease significantly in 2015 and free cash flow generation to be neutral as the company is consolidating the assets acquired in 2014. Total investments (including acquisitions) peaked at BRL353 million in 2014 compared to BRL178 million in 2013. In 2014, Minerva concluded its growth plan in Brazil and increased its presence in Uruguay. As a result, the company expanded its capacity of about 40%. In early 2015, the company signed an agreement to acquire the meatpacking company Red Carninca S.A. and Red Industrial Colombiana S.A.S. (jointly, Frigorifico Red Carnica), located in the region of Cordoba, Colombia, for about USD30 million. The company has also entered into an agreement with DIGNA S.A. for the rental of a slaughter and processing plant (EXPACAR), located in Asuncion, Paraguay. This is in line with the group's aim to expand outside Brazil. The assets acquired will contribute fully to operating cash flow in 2015 and 2016.

Strong Growth Due to Several Factors:

Minerva revenues and EBITDA are driven by increased capacity and export sales. Minerva also enjoyed higher price for fresh beef in the domestic market due to its strategy of optimizing distribution channels and focusing on food service and small and medium retailers. The company reported year-over-year gross revenues and EBITDA growth of 33.7% and 32.3% respectively in 2Q15 and EBITDA margin remained steady at about 9.7% (9.9% in 2Q'14).

Decrease in net leverage:

Fitch expects Minerva's net debt/EBITDA ratio to remain at about 4.0x-4.5x by 2015 (4.6x in second quarter 2015) and then to gradually decrease due to the ramp-up of profitability from the new plants acquired and the positive revenue impact of the devaluation of the real against the USD dollars. These factors should fuel EBITDA growth, despite slightly lower EBITDA margin for the full year because of higher cattle prices in Brazil in the first half of 2015.

Product, Country Concentration Risks:

Minerva is less diversified from a product and geographic position than the two other large protein companies based in Brazil, JBS S.A. and Marfrig S.A. About 69% of Minerva slaughtering capacity is located in Brazil, 13% in Uruguay, 13% Paraguay and 5% in Colombia.

With its large export presence, the company's profitability is also closely tied to 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 sanitary barriers, and strikes or other events that may affect the availability of ports and transportation.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Minerva include

--Double digit revenues growth driven by increased revenue (capacity, acquisitions) and the devaluation of the real against the U.S. dollar;

--Slight decrease in EBITDA margin;

--Neutral FCF;

--Net leverage towards 4x-4.5x in 2015.

RATING SENSITIVITIES

A negative rating action could occur as a result of a sharp contraction of the Minerva's performance, increased net leverage above 5x on a sustained basis 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, recurring positive free cash flow generation and substantial decreases in gross and net leverage of below 4x and 3x respectively on a sustained basis.

LIQUIDITY

The group's liquidity remains adequate as of June 2015. 18% of debt is short-term. The liquidity is supported by BRL2.6 billion of cash and cash equivalents (or BRL2.1 billion excluding Minerva's its own international bonds) compared to BRL1.1 billion in short-term debt. The main debt repayment is due in 2023 (BRL2.8billion). Approximately 80% of total debt was exposed to foreign exchange variation.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Minerva S.A.:

--Local Currency IDR at 'BB-';

--Foreign currency IDR at 'BB-';

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

Minerva Luxembourg S.A.:

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

--Perpetual notes at 'BB-'.

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

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991134

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991134

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/20150922006157/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
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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