McDonald's meat supplier suffering collateral damage

Not even Marfrig Global Foods SA, the Oak Brook-based McDonald's Corp. hamburger meat supplier that's won upgrades from two ratings companies in the past five weeks, could overcome investors' growing discontent over Brazil.

The Sao Paulo-based company said yesterday it canceled plans to sell seven-year bonds abroad after the yields demanded by investors didn't meet its target, extending an almost two-month drought in junk debt offerings from Brazil. The meatpacker wanted an interest rate of less than 8 percent, said a person familiar with the matter who asked not to be identified because the information is private. In June, it paid 6.875 percent to sell $850 million of notes due in 2019.

Marfrig was unable to persuade investors to accept lower yields at a time when a widening corruption investigation at state-run Petroleo Brasileiro SA and President Dilma Rousseff's handling of the economy are roiling the nation's financial markets, GAM UK Ltd. and Mitsubishi UFJ Securities said. Fitch Ratings lifted Marfrig's credit grade one level on Nov. 4, after a similar move by Standard & Poor's two weeks earlier.

"The country is in the early stages of what could be an extremely disruptive event," Bevan Rosenbloom, a strategist at Mitsubishi UFJ in New York, said in an e-mail. "It would be tough to see new deals out of Brazil for the remainder of this year. This isn't really an opportunistic market for issuers."

Issuance Drop

A press official for Marfrig, who asked not to be identified in accordance with company policy, declined to comment on the bond offering.

"Price levels indicated by investors did not meet Marfrig's original price target," the company said in a statement yesterday.

Brazilian companies have sold $3.3 billion of bonds overseas in the past three months, a 50 percent decrease from the same period in 2013, data compiled by Bloomberg show. In the same span, emerging markets corporate issuance in dollars has risen about 8 percent.

Marfrig had planned to use the money from the bond sale to buy back its $775 million of notes due 2020 in what would have been its fourth repurchase in the past year to extend maturities and trim debt-servicing costs. Yields on those notes have dropped 2.9 percentage points this year to 8.22 percent. Borrowing costs for emerging-market junk borrowers were little changed in that span at 7.4 percent.

Brazilian assets plunged this week, with the currency slumping to a nine-year low, after federal police arrested two former Petrobras directors and a group of construction-company executives as part of a growing bribery probe.

The investigation comes at a time when investors are concerned Rousseff, who won re-election last month, isn't moving fast enough to unveil policy changes to revive an economy mired in recession and plagued by inflation.

"Things have been going well for Marfrig, but the timing for Brazil isn't good," Klaus Spielkamp, head of fixed-income sales at Bulltick LLC, said by telephone from Miami. "Clients first want to know what's happening with Petrobras. The market needs to calm down for there to be issuance."

The president's press office did not reply to an e-mail sent after business hours seeking comment on the impact of the corruption investigation and the government's policy announcements on investor perceptions of Brazil.

Flavia Bedran, an analyst at S&P, said Marfrig's inability to sell bonds won't hurt the company's rating. On Oct. 16, S&P raised the assessment to B+, four levels below investment grade, in line with Fitch.

Marfrig 'Resilient'

"They've improved operations and shown to be resilient, and they've done their homework to reduce debt costs and extend maturities," Bedran said by telephone from Sao Paulo.

Brazil's woes are increasing the odds the country will have its ratings cut, according to Paul McNamara, a money manager who oversees $6.3 billion in debt at GAM.

In March, S&P lowered Brazil's rating to BBB-, one level above junk, citing the slump in Latin America's biggest economy and deteriorating fiscal accounts.

"Further downgrades are a given, especially given the current administration's lack of engagement," McNamara said by e-mail. "Marfrig is B rated, so a downgrade of the sovereign ceiling wouldn't affect the company. But it does color perceptions.'

--With assistance from Filipe Pacheco in Sao Paulo and Boris Korby in New York.