Brazil Beef Bonds Win Big and Lose Big Too as Currency Plunges

April 14, 2015 07:38 AM
Brazil Beef Bonds Win Big and Lose Big Too as Currency Plunges

The dollar’s surge may have helped turn meat producer JBS SA into the most lucrative bond investment in Brazil this year, but not all of the country’s beef exporters are proving winners.

Marfrig Global Foods SA, a supplier of meat to McDonald’s Corp. and Burger King Worldwide Inc., is actually saddling holders of its $850 million of notes due in 2019 with losses of 5.1 percent in 2015. That compares with an average drop of just 0.4 percent for similar junk-rated food companies globally and a 7 percent return for JBS notes.

The Sao Paulo-based meat producers’ vastly different fortunes underscore how the greenback’s ascent is rewarding companies that generate a majority of their revenue in dollars while proving a drag on those more dependent on faltering European and emerging-market currencies. While JBS gets 83 percent of its sales in dollars, Marfrig generates less than half of its revenue in the U.S. currency and a majority in the pound, euros and the real.

“There’s no catalyst for a rebound” in Marfrig bonds, Carlos Gribel, the head of fixed income at Andbanc Brokerage LLC, said by telephone from Miami. “The performance against JBS is not good, but JBS is a different animal now. It has really benefited from a strong dollar.”

Marfrig is seeking to increase beef exports and should ultimately benefit from the real’s depreciation, Chief Financial Officer Ricardo Florence dos Santos said.

‘Immediate Impact’
“The immediate impact on the balance sheet will be offset over the year by higher revenues and the dilution of costs in reais,” he said by telephone from Sao Paulo.

Debt investors are dumping Marfrig’s notes as Brazil’s real tumbles 1r percent against the dollar this year, the most in emerging markets as the nation’s economy sputters and a graft scandal erodes confidence. The euro has dropped 12 percent in that span while the pound has weakened 6 percent.

The real fell 0.8 percent Friday to 3.0816 per dollar as of 12:03 p.m. in New York.

Marfrig’s woes are being exacerbated by Brazil’s faltering beef exports to oil-producing countries from Russia to Venezuela that are buying less meat and demanding discounts. Brazilian beef shipments abroad sank 26 percent in the first quarter, while global meat prices fell by 10 percent, according to data compiled by Bloomberg.

‘Upside Potential’
Bondholders are also concerned a drop in revenue will drive up leverage at Marfrig, whose debt of 11 billion reais ($3.6 billion) is mostly denominated in dollars. The company’s net debt to earnings before interest, taxes, depreciation and amortization jumped to 5 times in the end of 2014, the highest at least since 2010.

To Ian McCall, a money manager at Quesnell Capital SA, Marfrig’s bonds won’t be money losers for long. He cited Marfrig’s plan to sell shares of Moy Park, the company’s poultry unit in U.K., this year to cut leverage.

“Marfrig bonds absolutely have upside potential,” McCall said by phone from Geneva. “I don’t think we’re going to stay at those types of leverage levels for very long. JBS is a clearer beneficiary of the U.S. dollar move, but the yields on its bonds are much lower.”

At 10.6 percent, Marfrig’s bonds yield 4.5 percentage points more than similar-maturity JBS notes. Marfrig’s B rating from Standard & Poor’s is two levels lower than JBS’s and four steps below investment grade.

“Investors feel more comfortable owning JBS even at lower yields when the market is risk averse,” Omar Zeolla, a corporate credit analyst at Oppenheimer & Co., said by e-mail from New York. “Leverage is still high for Marfrig.”

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