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BRF: Moody's Downgrades Company Rating To Ba2

(Agencia CMA Latam) - Risk agency Moody's downgraded Brazilian food company BRF's credit rating to 'Ba2', from 'Ba1' with a negative outlook, pointing to the firm's weak credit metrics and saying that leverage should remain high in the coming quarters.

"The downgrade to Ba2 is mainly a consequence of BRF's persistently weak credit metrics and our expectation that a recovery will take longer than initially anticipated," said Moody's.

The agency points out that BRF's net debt ratio per EBITDA (earnings before interest, taxes, depreciation, and amortization) increased substantially in the last two years, to 4.6 times in 2016 and to 5.6 times in 2017, far from the level Moody's considers ideal (3.5 times).

The deterioration of the company's indebtedness is due to "disbursements relative to M&A activity, weak margins in 2016 and 2017 following the steep increase in Brazils corn prices, as well as poor operating performance domestically and abroad."

Moody's noted, however, that it continues to forecast improved operating performance this year and the next.

BRF still has a good business profile, solid financial position and leadership in processed foods in Brazil and global poultry exports, Moody's said.

"The value added portfolio and strong brands provide the company with an important competitive position, but have not insulated BRF from the inherent volatility of commodity prices and from the protein business' susceptibility to event risk," the report added.

Moody's also notes that the negative outlook on BRF's ratings incorporates the companys current weak credit metrics for the rating category.

"The outlook also incorporates a progress towards a gross leverage below 3.5x in the next 18 months," it said.

According to Moody's, a further downgrade could result from a deterioration in liquidity or the inability to progress towards deleveraging.

"Quantitatively, a downgrade could also occur if, on a sustained basis, Debt/EBITDA remains above 3.5 times, EBITA/interest expense is less than 2.0 times or CFO/net debt less than 25%. Also, a negative action on Brazil's rating could lead to a reassessment of the perceived correlation between the sovereign's and BRF's credit quality," Moody's said.

Regarding the police investigation that revealed fraud in the company in the preparation of sanitary reports to hide the presence of salmonella in chicken meat, which resulted in the suspension of exports of three plants, Moody's notes that the suspension "would have a small potential impact of less than 1% of BRF exports."

by Agencia CMA Latam

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