Bond Darling BRF Tames Scandals and Debt With Help of Pig Fever

(Bloomberg) -- BRF SA is putting bribery scandals in the rear-view mirror to emerge as a bondholder favorite as a pig-killing disease spreading through Asia signals wider margins and lower debt for the Brazilian food giant. The Sao Paulo-based chicken and pork supplier’s bonds due 2026 have handed investors a 15% return in the past six months, the most among high-yield bonds issued by protein producers globally and the best performer in Brazil.

To be sure, all Brazilian meat companies have rallied in 2019 as China fills a protein gap left by African swine fever and domestic demand strengthens. But for BRF, a brighter demand outlook coincides with a push to bring down debt and rebuild a reputation tarnished by food-safety scandals in the past two years. Bond prices are trading at record highs and the yield gap with rivals has widened.

“BRF is trying to return to what it was before the crisis,” Soummo Mukherjee, an analyst at Lucror Analytics in New York, said by phone. “We now have at least one year of evidence that the company is taking the deleverage plan seriously.”

BRF’s turnaround started in mid-2018. That’s when Pedro Parente -- the executive lauded for fixing state-run oil
giant Petrobras SA -- took the helm, ending months of conflict among top shareholders.

Under Parente, BRF sold assets in Thailand, Europe and Argentina and divested a stake in beef producer Minerva SA, raising cash to ease debt. The company also halted production in some Brazilian plants to adjust output to new demand levels, creating conditions for a price recovery.

The efforts were followed by a decline in feed costs and a swine-fever-fueled increase in export demand and prices. Then last month, under new chief executive officer Lorival Luz, China allowed imports from two more BRF plants, boosting export capacity to China by 30% for chicken and 50% for pork, according to Bradesco BBI estimates.

Earlier this month, BRF avoided police raids at its plants by cooperating with a federal investigation. The company affirmed that former executives had made illegal payments to inspectors, while providing evidence against the inspectors. Collaborating with police was seen as a way to turn the page on the scandals, Lucas Ferreira, an analyst
at JPMorgan Chase & Co., wrote in a report earlier this month. “The new management has certainly provided the market more confidence in terms of governance,” said Carlos Gribel, the Miami-based head of fixed income at Andbanc Brokerage.

2019-10-14

By Tatiana Freitas