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Brazil: Moody's upgrades JBS, one of our top picks

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

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    Tellimer Research
    16 December 2019
    Published byTellimer Research

    In our new Top 5 picks and 2020 outlook report, we added JBS S.A. (JBSSBZ) to our list of top LatAm credits, noting a few factors that should make JBS bonds trade higher. First, the likely IPO of the company’s operations in the US, a substantial proportion of the proceeds of which may be used to pay down debt. Second, a resultant rating upgrade. The latter would reflect the company’s continued de-levering, as seen in the Q3 numbers, where leverage was 2.9x, compared with 3.6x at end-18 and a high of 5.3x at end-16.

    Today, Moody's upgraded JBS's corporate family to Ba2 from Ba3, as well as the senior unsecured ratings of its wholly owned subsidiaries, JBS USA Lux. S.A. and JBS Investments II GmbH. Moody's also upgraded the secured term loan under JBS USA Lux. S.A. to Ba1 from Ba2. The outlook on all the ratings is stable.

    In our report, we favored the company's US$1.25bn 5.5% senior unsecured bonds due 2030 (which trade at 107.6 with a yield to maturity of 4.3%, z-spread 266bps, as of 13 December), issued by JBS US, noting that they compares well with BRF’s US$750mn 4.875% senior unsecured bonds due 2030, which trade at US$101.1 to yield 4.7% (either to worst or to maturity) as of 13 December. JBS is a much better company fundamentally, and should benefit from the positive catalysts, BRF is still in the process of completing its corporate strategy.

    We believe other rating agencies could upgrade JBS, and expect the company's plans to IPO its US operations and to expand its Brazilian capacity (while also focusing on reducing leverage further) to be the catalysts.

     The full report by Moody's is as follows:

    "Moody's upgrades JBS to Ba2; stable outlook

    New York, December 16, 2019 -- Moody's Investors Service ("Moody's") upgraded JBS S.A. (JBS)'s corporate family rating to Ba2 from Ba3 and the senior unsecured ratings of its wholly-owned subsidiaries JBS USA Lux S.A. and JBS Investments II GmbH to Ba2 from Ba3. The rating of the secured term loan under JBS USA Lux S.A. was upgraded to Ba1 from Ba2. The outlook for all ratings is stable.

    Ratings actions:

    Issuer: JBS S.A.

    LT Corporate Family Ratings: upgraded to Ba2 from Ba3

    Issuer: JBS Investments II GmbH

    US$1000 million GTD global notes due 2026: upgraded to Ba2 from Ba3

    US$750 million GTD global notes due 2028: upgraded to Ba2 from Ba3

    Issuer: JBS USA Lux S.A.

    US$245 mm GTD GLOBAL NOTES due 2021: upgraded to Ba2 from Ba3

    US$150 mm GTD NOTES due 2024: upgraded to Ba2 from Ba3

    US$750 mm GTD SR GLOBAL NOTES due 2024: upgraded to Ba2 from Ba3

    US$150 mm GTD NOTES due 2025: upgraded to Ba2 from Ba3

    US$900 mm GTD GLOBAL NOTES due 2025: upgraded to Ba2 from Ba3

    US$900 mm GTD GLOBAL NOTES due 2028: upgraded to Ba2 from Ba3

    US$1000 mm GTD GLOBAL NOTES due 2029: upgraded to Ba2 from Ba3

    US$400 mm GTD NOTES due 2029: upgraded to Ba2 from Ba3

    US$1250 mm GTD GLOBAL NOTES due 2030: upgraded to Ba2 from Ba3

    US$1900 mm GTD SR SEC TERM LOAN due 2026: upgraded to Ba1 from Ba2

    The outlook for all ratings is stable

    RATINGS RATIONALE

    The upgrade of JBS's ratings to Ba2 is supported by the reduction in financial leverage and liquidity risk as a consequence of stronger operating performance and successful liability management initiatives between September 2018 and September 2019 that resulted in the extension of debt maturities and reduced funding costs. In addition, the company fully repaid the Normalization Agreement, established in May 2018 for a total amount of BRL12.2 billion (US$2.9 billion), and originally due in 2021. The full repayment of the Normalization Agreement released about BRL7.8 billion in collateral.

    JBS's Ba2 ratings are supported by the strength of its global operations as the world's largest protein producer and its substantial diversification
    across protein segments, geographies and markets. JBS' strategy to expand its global footprint into value-added processed food segments has improved its business profile and will lead to more stable and stronger operating margin and cash flow over time. JBS's robust liquidity position also support the ratings. The company has a cash balance of US$1.9 billion at the end of September 2019, plus US$1.9 billion available under committed credit facilities, and no significant debt maturities until at least 2023.

    Corporate governance concerns continue to weigh on the company's credit profile, and the risks related to a series of judicial processes,
    investigations and litigations, which can directly or indirectly involve JBS and its shareholders. J&F signed a leniency agreement that reduced JBS's
    exposure to any future liability, however, the risk is not fully eliminated. JBS continues to be controlled by the Batista family.

    In May 2019, JBS implemented financial policies, including clear targets for leverage, minimum cash levels and dividends. Those policies support a more conservative financial management, moderate leverage, and strong free cash flow generation. In addition, the company has implemented several internal controls since 2018, including policies and guidelines on product donations, sponsorship, offering and/or receiving gifts, and conflict of interest, among others. Overtime, these initiatives will provide support in key risk areas of JBS's governance and risk oversight.

    The ratings are also constrained by the inherent volatility in the protein industry, which is subject to risk factors such as weather conditions, diseases, supply imbalances and global trade variables, and the company's history of aggressive growth via acquisitions, impacting leverage.

    The stable outlook reflects our expectation that JBS's operational performance will remain strong, including in the beef segment, which represents about 50% of the company's EBITDA (USA and Brazil beef segments), as well as in processed and prepared foods segments in the US, Brazil and its export
    business. The stable outlook also reflects our expectation that strong cash flows from operations will allow JBS to further reduce funding costs and
    leverage.

    An upgrade would be subject to the overall earnings stability of JBS, sustained conservative financial policies, and further reduction of event risks related to litigations and investigations directed to the company and controlling shareholders. An upward rating movement would also require JBS to
    maintain a strong liquidity position, low leverage and improve coverage metrics, with leverage, measured by total debt/EBITDA, sustained below 2.5x
    and interest coverage, measured by EBITA/interest expense, improving towards 5x.

    The ratings could be downgraded if the company's operating performance weakens, its financial policy becomes more aggressive or its liquidity deteriorates. A downgrade could be triggered by events that can increase liquidity risk, including litigations and M&A. Quantitatively, the ratings
    could be downgraded if total debt/EBITDA stays above 3.5x, and cash flow from operations/debt stays below 20% for a prolonged period. All credit metrics incorporate our standard adjustments.

    The principal methodology used in these ratings was Protein and Agriculture published in May 2019. Please see the Rating Methodologies page on
    www.moodys.com for a copy of this methodology.

    Headquartered in São Paulo, Brazil, JBS S.A. (JBS) is the world's largest protein producer in terms of revenue, slaughter capacity and production. The
    company is the leader in beef, chicken and leather, and it is the second-largest pork producer in the US. The company has a presence in over 190
    countries, with large scale and diversification.

    For the 12 months ended September 2019, JBS reported consolidated revenue of BRL194.7 billion (US$50.3 billion), with an adjusted EBITDA margin of 10.5%. JBS USA Beef, which represents the beef and lamb operations in the US, Canada and Australia, is the company's largest business segment, accounting for 43.1% of its total revenue for the 12 months ended September 2019. Pilgrim's Pride Corporation (Pilgrim's Pride, Ba3 stable), including Moy Park (UK poultry), accounted for 21.8% of the total revenue, while the US pork business contributed 11.6%. JBS S.A. Brasil (Beef Brazil) represented 15.3% of the total revenue for the same period. Brazil-based Seara S.A. (Seara), which comprises poultry, pork and processed foods operations, was responsible for 9.9% of revenue."