Fitch Upgrades JBS' IDR to 'BB+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- 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'. The National Scale rating was upgraded to 'AA (bra)' from 'A+(bra)'.

KEY RATING DRIVERS

The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

The upgrades reflect JBS S.A.'s strong product and geographic diversification, as well as the successful integration of several acquired businesses over the past few years. It also factors in the strengthening of its business profile due to the recent acquisitions in the U.S., Europe and Australia. Fitch estimates that these acquisitions will contribute to about 10% of total EBITDA by 2016. Furthermore, Fitch expects the company to report strong performance in all of its divisions in 2015 and 2016. JBS's ratings are tempered by management's acquisitive nature and appetite for growth.

Strong Business Profile:

JBS S.A.'s ratings are supported by its strong business profile as the world's largest beef and leather producer and its overall product diversification into poultry, beef, pork and other prepared foods. The company's product and geographic diversification help mitigate risks related to disease and trade restrictions as about 70% of net revenues are generated from JBS's operations outside of Brazil (most notably the U.S.); exports represent about 30% of group sales. Fitch expects the acquisitions of Moy Park, Primo Smallgoods Group, Tyson Mexico and Cargill Pork (still pending) to further enhance JBS's business profile by increasing its product portfolio and adding to geographic diversification.

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. The industry is responding to these challenges by reducing its processing capacity in the country. Brazilian exporters are benefitting from the depreciation of the real and the growing demand for beef worldwide. Asia and the Middle East remain the positive growth drivers. In the U.S., JBS' beef segment is experiencing a recovery due to higher demand although beef margins are expected to remain challenged as cattle inventories build. Low grain prices should continue to support profitability in JBS' U.S. chicken segment.

Moderate Leverage:

Fitch expects JBS's net debt/EBITDA ratio to increase to about 3.0x by the end of 2015 from 2.3x in 2014 as a result of the acquisitions made in 2015 and the devaluation of the real against the U.S. dollar (87% of JBS debt is in USDs as of June 2015). This is mitigated by the fact that 84% of JBS net revenues are in USDs and 100% of its debt was hedged as of June 2015. Fitch considers JBS' balance sheet hedging strategy is aggressive and adds to its overall risk profile despite having a recent positive impact on the company's net leverage. Fitch expects JBS to report double-digit EBITDA growth and positive free cash flow (FCF) generation in 2015 fuelled by the devaluation of the real against the U.S. dollar, the integration of assets acquired and the group's focus on operating efficiency. JBS reported strong sales and EBITDA growth in the second quarter of 2015 (2Q15). EBITDA reached BRL3.6 billion, an increase of 47% compared with 2Q14.

Acquisition Risk:

Fitch believes the company will continue to pursue growth opportunities to strengthen its business profile in the medium term. In March 2015, the group acquired Primo Group, Australia's biggest ham and bacon producer, for USD1.125 billion. In June 2015, JBS agreed to buy Moy Park Ltd from Marfrig Global Foods S.A. for USD1.5 billion. Finally, the group also announced that it has entered into an agreement with Cargill to acquire the company's U.S.-based pork business for USD1.45 billion which will increase JBS presence in the U.S. The latter deal is subject to the regulatory approvals, including U.S. antitrust authorities.

KEY ASSUMPTIONS

--Double-digit revenue growth driven by acquisitions and devaluation of the real against the U.S. dollar

--Slight compression of EBITDA margin, notably for JBS Mercosul

--Positive group FCF

--Net debt/EBITDA to about 3.0x by FYE2015

RATING SENSITIVITIES

A downgrade could be precipitated by an increase in JBS' net leverage ratio to above 3.5x on a sustained basis due to a sharp contraction in its operating margins, negative FCF generation, and/or significant debt-funded acquisitions.

An upgrade is unlikely over the next 24 months as the company further displays consistent financial discipline to meet stated financial targets and objectives. An upgrade could result from the company showing consistent positive FCF generation and resilient operating margins, while maintaining its solid business profile, leading to its net leverage ratio falling toward or below 2.5x on a sustained basis.

LIQUIDITY

JBS' liquidity is supported by its cash balance, positive FCF and committed undrawn bank lines. As of June 30, 2015, the company had BRL13.9 billion of cash and marketable securities and short-term debt of BRL15.9 billion (mostly trade finance debt). In addition, JBS USA LLC had USD1.6 billion in fully committed available lines. The group has also satisfactory access to the capital markets.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the following ratings:

JBS S.A.:

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

--National Scale rating to 'AA (bra)' from 'A+(bra)';

--Notes due 2016 to 'BB+' from 'BB'.

JBS USA LLC:

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

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

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

JBS USA Finance, Inc:

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

JBS Investments GmbH

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

Additional information is available on 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=991570

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991570

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/20150930006366/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
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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