BRF Bonds Dogged by Salmonella Scare Overshadowing New Chairman

(Bloomberg) -- The relief for BRF SA bondholders was short-lived.

Notes from Brazil's largest packaged food producer are tumbling this week, reversing course after a brief rally sparked by last month's naming of Pedro Parente, the respected chief executive of state oil giant Petroleo Brasileiro SA, as chairman of the beleaguered company. Investors are now refocusing on BRF's fundamentals, and not liking what they see.

The meatpacker is struggling to regain its footing after a food-safety scandal involving allegations it falsified salmonella test results prompted Europe to ban its products, further dimming prospects for a recovery after the company's worst-ever results last year. It was forced to halt operations at some of its chicken plants to account for reduced demand while facing a jump in feed costs in Brazil. The domestic market isn't providing any relief, with chicken supplies surging and lower-priced value brands gaining market share.

“Parente is great to bring confidence, but there are too many factors outside of anyone's control that will continue to impact BRF's earnings,” said Soummo Mukherjee, an analyst at Mizuho Securities USA in New York, who added that BRF may have to sell assets or raise equity to cut debt levels. “To the bondholders, a strategy for quick deleveraging is what matters.”

Prices for BRF's $750 million of bonds due in 2024 are down 9.8 percent this year, the most among Brazilian corporates. The yield discount to rival JBS SA's similar-maturity bonds dropped to a record 0.3 percentage point April 16 -- a signal that BRF's perceived risk is converging with that for the lower-rated rival -- before rebounding to 1.2 percentage point. The stock has lost about a third of its value, the worst in Brazil's benchmark stock gauge.

BRF declined to comment on the performance of its securities.

The foodmaker's leverage is among the highest in the industry and poised to increase amid a likely drop in earnings, according to Mukherjee. Net debt may spike to 5.2 times earnings before interest, taxes, depreciation and amortization by the end of the year from the current 4.3 times, a prospect that made the bond gains that followed Parente's nomination seem exaggerated, he said.

Parente, who is taking the chairman role from billionaire Abilio Diniz, has been much lauded for turning around Petrobras after the oil producer was caught up in a graft scandal that disrupted operations and sent some of its top executives to jail. While his presence should help restore BRF's credibility, any bond gains will depend on the company's ability to quickly reverse the effects of the embargo and restore profits, according to Carlos Gribel, the head of fixed income at private investment bank Andbanc Brokerage in Miami.

Yields on BRF's notes due in 2024 will remain above 6 percent until the company reports improved results, according to Michael Roche, a fixed-income strategist at Seaport Group.

BRFs' challenge is “restoring investor confidence,” Roche said. “And that can only come via demonstrated operational improvements and regulatory compliance.”

To contact the reporter on this story: Gerson Freitas Jr. in São Paulo at gfreitasjr@bloomberg.net.

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Brendan Walsh

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