JBS SA’s decision to submit its business to increased US scrutiny appears to be paying off with debt investors, as the bonds of the world’s largest meat packer are largely outperforming those of its peers.
(Bloomberg) — JBS SA’s decision to submit its business to increased US scrutiny appears to be paying off with debt investors, as the bonds of the world’s largest meat packer are largely outperforming those of its peers.
The Brazilian firm last month became a public reporting company under requirements of the U.S. Securities Exchange Act of 1934 after it obtained the green light from the regulator. JBS is also in the process of replacing its existing dollar-denominated bonds with new ones and is seeking shareholder approval to trade its stock, which is currently listed in Sao Paulo, in New York City.
The moves are helping lift JBS notes. The company’s $10.7 billion in outstanding debt have returned an average 3.7% since May 19, when it filed for the registration with the Securities and Exchange Commission. That’s the best performance compared with peers in a Bloomberg index of investment-grade rated food and beverage securities, which has lost 1.7% during the period. The premium that bondholders demand to hold the company’s $2 billion in notes due in 2033 relative to Treasuries that mature at the same time has slumped by more than 1 percentage point from a peak in May.
By submitting to stricter oversight, JBS wants to access a broader pool of investors, get more analyst coverage, boost its reputation and be viewed more like a US company than a Brazilian one. It already generates roughly half of its $72 billion in annual revenue from its American beef, pork and chicken operations, with Brazil accounting for only 12%.
“We’ll have more compliance,” Chief Financial Officer Guilherme Cavalcanti said in an interview, referring to the company’s new status as a US-registered company. Starting this quarter, the company will report its earnings fully in US-dollars and follow the standards set by the Public Company Accounting Oversight Board, he said.
JBS has had to cope with higher borrowing rates than Tyson Foods Inc. and other US-based rivals since it started tapping international debt investors almost two decades ago. That’s in part due to risks and costs associated with its Brazilian domicile. The meat producer’s credit ratings are also constrained by governance concerns as the firm remains tightly controlled by the Batista family, Fitch Ratings Inc. said in a note earlier this month. In 2017, JBS was at the center of a massive bribery scandal involving the billionaire brothers Wesley and Joesley Batista, who ran the company at the time. J&F Investimentos SA, the family holding which controls JBS, declined to comment.
“Coming under the purview of the SEC has the potential to give investors more comfort in investing in the name, especially since they are a Brazilian domiciled company”, said Ashley Allen, a credit analyst at Franklin Templeton Cos. Recent actions by the company, including the US listing plan, “should lead to cost of capital being lower for JBS”.
Read More: World’s Top Meat Packer JBS Seeks Long-Awaited NYC Listing
“On the back of the company’s past corporate governance issues, the additional scrutiny from the higher regulatory oversight will provide great support to bondholders,” said Cesar Fernandez, Chief Investment Officer at Alpha Credit Advisors Ltd. The move is also expected to provide additional liquidity, shave off risk and “help with the company’s process of converting itself in a truly global company,” he added.
A large majority of JBS bondholders should have agreed to replace their notes with SEC-registered ones by Monday, when the exchange period ends, according to Cavalcanti. That means the company’s debt will no longer face trading restrictions in the US. “Bondholders have always asked for the registration,” the executive said.
Like most securities issued by Latin American companies, the meat processor’s existing notes are currently traded under exemption rules and can only be purchased by qualified investors. In August 2022, JBS agreed with bondholders that it would pursue a registration of its bonds with SEC. Interest on its notes would increase by 0.25% a year if the company failed to deliver on its promise within 12 months.
The commitment — known as registration rights — made it possible for JBS bonds to be included in Bloomberg’s benchmark for US investment-grade issuers. The company is the fifth largest debt issuer among food and beverage companies in the index. Other Brazilian commodity companies that have SEC-registered bonds include pulp producer Suzano SA, iron ore giant Vale SA and state-owned oil explorer Petroleo Brasileiro SA.
The US share listing would “substantially boost” the company’s ability to use equity to finance growth, JBS Chief Executive Officer Gilberto Tomazoni last month said in an interview. That in turn could be good news for bondholders as it might reduce the company’s reliance on debt financing.
Still, the company’s plan for an extraordinary dividend of as much as $500 million in case the listing is approved could signal a more aggressive financial policy and raises questions about the meat packer’s commitment to keeping leverage under control, S&P Global Ratings said in a note last month.
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