NEW YORK, June 22 (IFR) - Bonds issued by Brazilian beef producer Marfrig were enjoying a five-point rally on Monday as investors cheered the deleveraging potential behind its sale of UK subsidiary Moy Park.
The company’s bonds leapt this morning after Marfig announced late Sunday that it would sell Moy Park to its larger rival JBS in a transaction valued at US$1.5bn comprising a cash payment of US$1.19bn and GBP200m of net debt.
The sale is seen as credit positive as it will allow the company to deleverage further and eliminate the uncertainty over how Marfrig would monetize an asset that it had been expected to spin-off.
“If Marfrig was going to maintain a majority (stake) in Moy Park, it wouldn’t have been able to raise enough to lower leverage (substantially),” said Omar Zeolla, a corporate analyst at Oppenheimer & Co. Inc.
Gross debt following the sale is expected to drop to R$8.321bn from R$13.4bn, cutting net debt to approximately R$5.7bn, the company said in a presentation to investors.
The idea is to improve free cash flow, which will be used to increase Brazilian beef exports and accelerate growth opportunities in the US and Asia.
Net debt to Ebitda jumped from three times in 2013 to five times by the end of last year, but Fitch expects that to drop to 4-4.5 times by the end of 2015.
While JBS’s recently issued 2025s were down about a point in the morning at around 98.50 mid-market, many see the deal as a win-win situation for both parties.
“Marfrig is getting a good price, but JBS has an ability to turn acquisitions around quickly and people had been worried that they might do a much bigger acquisition,” said a senior banker.
Marfrig’s 2019s and 2020s, rated B+/B+/B2, were respectively being quoted on Monday morning at around 94.00-95.00 and 102.50-103.50.
That marks an up to five-point jump from the 90.50 and 98.00 mid market prices being quoted on Friday, but really only puts them back close to levels seen in mid-May.
“People had been getting increasingly pessimistic about margins,” said the banker.
“(The sale) addresses the question of what they are going to do with Moy Park and they are pulling down leverage, but the question is: can they really generate better cash flows from the business?”
Over the last year or so, Marfrig has improved its debt profile through a series of liability management transactions.
However, it was forced to abandon a planned bond sale and tender offer in November after failing to see eye to eye with the buyside over pricing and as the kick-back scandal surrounding Petrobras weighed on Brazilian credits overall.
This was followed by the resignation in January of its CEO Sergio Rial, the former Cargill executive and Bear Stearns banker who had led the charge on the deleveraging front.
The move sent the 2019s and 2020s to yearly lows in mid February of 84.10 and 90.00 before they started recovering later that month. (Reporting By Paul Kilby; Editing by Shanker Ramakrishnan)