Fitch Ratings - New York - 22 Sep 2020: Fitch Ratings has upgraded Marfrig Global Foods S.A.'s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'BB' from 'BB-', and MARB BondCo PLC and NBM US Holdings, Inc.'s senior unsecured notes to 'BB' from 'BB-'. In addition, Fitch has upgraded Marfrig's National Scale rating to 'AA+ (bra)' from 'AA-(bra)'.

The upgrades reflect Marfrig's improved business and financial profile over the past few years. The company's 81.7% stake in National Beef has lowered its exposure to Brazil and has diversified its exposure to two cattle cycles and has improved its access to more markets. Strong industry conditions in 2020 have resulted in extraordinarily strong cash flow in the U.S., which has further enhanced the company's liquidity and capital structure. The Rating Outlook is Stable.

KEY RATING DRIVERS

Robust Business Position: Marfrig's ratings incorporate the company's size and geographic diversification in the volatile protein commodity industry. The company is a pure beef player with a processing capacity of 29,100 head/day. Marfrig increased its participation in National Beef to 81.7% from 51% in 2019, which is a positive from a credit perspective due to lower cash leakage. National Beef is the fourth-largest beef processor in the United States with approximately 14% of the beef processing capacity in the U.S. (13,100 head/day). In South America, Marfrig is one of the region's leading beef producers, with a primary processing capacity of more than 17,100 heads of cattle per day and an annual production capacity of 77,000 tons of beef patties.

Strong Capital Structure: Fitch expects Marfrig's adjusted Net debt/EBITDA ratio to be 2.2x and gross leverage to be about 3.5x in 2020. Fitch projects that Marfrig's EBITDA will grow to BRL8.5 billion in 2020 from BRL4.9 billion in 2019 and that it will generate about BRL2.2 billion of FCF (including dividends paid to minority shareholders in National Beef). The company is benefiting from strong trends in the industry due to high availability of cattle in the U.S. during a period of industry production constraints. Strong export markets followed by rising protein prices globally as a result of the African Swine Flu, which has decimated China's pork industry and increased demand for protein from that market, has all bolstered the company's performance. The weakening of the Real against US dollar also improved the competitiveness of Marfrig's exports from South America.

Geographical Diversification: Marfrig's exposure to the volatile beef segment of the protein sector is partially mitigated by its geographic diversification into the two largest beef producing markets. Fitch estimated that National Beef represented about 86% of the group EBITDA, and the remaining 14% was represented by South America (mostly in Brazil) as of 2Q20. Sales from National Beef are primarily made in the U.S., which reduces the company's exposure to risks related to trade tariffs, quotas and bans. Exports represented 68% of South American revenues, of which 65% came from shipments to China and Hong Kong in 2Q20. The company has thirteen accredited plants for exporting to China. Marfrig's geographic diversification also helps to decrease risks related to disease, cattle cycles and currency fluctuation. This geographical diversification enables the groups to mitigate cattle cycles, sanitary and environmental risks.

Favorable Beef Demand: Marfrig's competitive advantages stem from its large scale of operations, access to exports markets from Brazil and the U.S., and long-term relationships with farmers, customers and distributors. Global beef fundamentals are expected to remain positive in the next couple of years for South American and U.S. producers due to increased demand and good cattle availability. U.S. beef production is forecast to be flat in 2020, according to the USDA. In exports, South America is poised to remain a top supplier to Asia as pork production will be hindered by disease issues.

DERIVATION SUMMARY

Marfrig's ratings reflect its solid business profile and geographic diversification as a pure play in the beef industry with a large presence in South America (notably Brazil) and in the U.S. with National Beef. Marfrig is well positioned to compete in the global protein industry due to its size and geographic diversification. The business compares favourably regarding size with its regional peer Minerva S.A. (BB-/Stable), which is mainly a beef processor in South America. JBS S.A. (BB+/Stable) and Tyson Foods (BBB/Negative) enjoy a higher level of scale of operations, stronger FCF, and higher product and geographical diversification than Marfrig.