BRIEF-Fitch says 'bad bank' may push India loan clean-up
* Fitch: Bad bank may push India loan clean-up; leaves capital gap
Jan 28 - Fitch Ratings has assigned an expected rating of 'BB-' to a proposed benchmark size senior unsecured notes offering of a JBS S.A. (JBS) subsidiary. The notes, which will be due in 2023, are being issued by ESAL GmbH, a wholly owned subsidiary of JBS based in Austria. These notes will be unconditionally guaranteed by JBS and JBS Hungary Holdings Kft. The proceeds are expected to be used to refinance shorter maturity indebtedness and for general corporate purposes. A complete list of Fitch's ratings of JBS is provided at the end of this release. The 'BB-' rating takes into consideration JBS's strong business profile as the world's largest beef and leather producer and one of the largest producers of chicken and lamb. Further factored into JBS' ratings are the company's geographic and product diversity, which partially mitigates the risks of trade barriers and animal diseases. JBS has high leverage and its risk profile is above average due to cyclical risks associated with the meat business and the company's aggressive attitude toward growth through acquisitions. While its business profile benefits from the improved diversification through past acquisitions, the risk of additional acquisitions in the medium term remains above average. SENSITIVITY/RATING DRIVERS: The Rating Outlook for JBS and its rated subsidiaries is Negative. A revision of the Outlook to Stable could be triggered by a number of factors that include financial improvements above Fitch's expectations, given the current operating environment, and/or sufficient capital injections to meaningfully reduce debt. A downgrade could be precipitated by the additional weakening or a lack of an improvement in the company's financial performance and leverage metrics. Continued negative free cash flow (defined as cash flow from operations less capital expenditures and dividends) beyond current expectations could also result in negative rating actions. A downgrade of JBS's corporate rating would trigger the downgrade of the rating of the proposed bonds. High Leverage and Negative FCF Despite Recent Operating Improvement: Fitch considers net debt-to-operating EBITDA in the 3.0 times (x) range to be the normalized leverage ratio for the 'BB-' rating category for companies in the protein industry, which face volatile and cyclical operating earnings. For the last 12 months (LTM) ended Sept. 30, 2012, JBS' net leverage ratio stood at 3.7x, which is high for the rating category. Generating positive free cash flow (FCF) and meaningfully reducing leverage within the next 12-18 months remain the largest challenge for the company. Main concerns in 2013 are cattle availability and oversupply of pork in the U.S. Possible grain price shocks could also pressure costs and profitability, which would hurt the company's ability to deleverage. Positively, a competitor has recently closed a large beef processing facility in Texas, which should help improve cattle availability. JBS' operating profit and cash flow improved in the third quarter of 2012, in line with Fitch's expectations. Cash Flow from operations (CFFO) improved to BRL624 million for the LTM ending Sept. 30, 2012, as compared to BRL464 million in 2011. Negative FCF of BRL748 million during the LTM continued to reflect high capital expenditures of BRL1.4 billion. Net revenues have been on an upwards trend in the past five years, fueled by acquisitions and capital investments. EBITDA margins remain at the low level of 4% to 7%, which is typical for the industry. For the LTM ending Sept. 30, 2012, net revenues of BRL71 billion and EBITDA of BRL4.1 billion resulted in an EBITDA margin of 5.8%. Adequate Liquidity, Reliance on External Financing JBS has an adequate liquidity position and a manageable 2013 debt maturity schedule, both of which will be improved with the current offering. As of Sept. 30, 2012, cash and marketable securities of BRL5 billion covered 0.9x of short-term debt of BRL5.5 billion. As a mitigating factor, about 65% of short-term debt corresponds to trade finance lines that support export activity. The company also needs to maintain about 10% of EBITDA to support its working capital, which was about BRL400 million for the LTM ending Sept. 30, 2012. Considering these two adjustments, short-term maturities of long-term debt were covered more than 2.0x by available cash. In addition, the company's JBS USA division has about USD699 million available under its asset-based loan (ABL) facility and PPC has about USD573.6 million available under a separate facility. JBS's maturity schedule for 2014 is heavy with close to BRL4 billion of debt coming due. Fitch projects that JBS's FCF generation will be neutral to negative in 2013, which will continue to make the company dependent upon external financing to address its 2014 maturities. Solid Business Profile: JBS' credit ratings are supported by a strong business position in the world production of beef, lamb and chicken. The company benefits from geographic and product diversity, which mitigate risks related to disease, the imposition of sanitary restrictions by governments, market concentrations, as well as tariffs or quotas applied regionally by some importing blocs or countries. JBS has plants in 12 Brazilian states and is the most geographically diversified player within this industry in Brazil, as it has operations in the U.S., Mexico, Argentina, Paraguay, Uruguay, Italy, and Australia. The company is domiciled in Brazil and has a significant footprint in the U.S., with about 66% of its revenues coming from that region, per Fitch's estimates. Above-Average Industry Risk and Acquisition Profile: The protein industry is volatile and exposed to fluctuations in commodity prices by nature. The company's aggressive attitude toward growth through acquisitions amplifies that risk. While its business profile benefits from improved diversification through past acquisitions, the risk of additional acquisitions remains. Equity Financing: The credit benefits from the implicit support of the Brazilian development bank's investment arm (BNDESPar), which directly and indirectly holds 23% after it transferred 10.1% in January 2013. The founding family indirectly controls 44% of JBS's shares. The company's ability to finance part of its expansion with equity benefited its capital structure, avoiding peaks in leverage. Fitch currently rates JBS as follows: JBS S.A.: --Foreign and local currency Issuer Default Rating (IDR) at 'BB-'; --Notes due 2016 at 'BB-'; --National scale rating at 'A-(bra)'. JBS USA LLC: --Foreign and local currency IDR at 'BB-'; --Term loan B facility due in 2018 at 'BB'. JBS USA Finance, Inc: --Foreign and local currency IDR at 'BB-'. JBS USA jointly with JBS USA Finance: --Notes due 2014 at 'BB-'; --Bonds due 2020 at 'BB-'; --Notes due 2021 at 'BB-'. JBS Finance II Ltd: --Foreign and local currency IDR at 'BB-'; --Notes due 2018 at 'BB-'. The Rating Outlook for JBS S.A., JBS USA LLC, JBS USA Finance Inc. and JBS Finance II Ltd is Negative. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). --'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology Parent and Subsidiary Rating Linkage
* Fitch: Bad bank may push India loan clean-up; leaves capital gap
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* Costa Rica long-term ratings affirmed at 'BB-' with a negative outlook as fiscal and external vulnerabilities remain