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Salmonella Nightmare Could Make Food Giant’s Bonds High-Yield Junk

BRF SA’s bonds are tumbling on speculation the Brazilian food giant will be cut to junk after this week’s food-safety scandal added to the company’s woes.

The chicken producer plunged into crisis Monday after police said BRF executives conspired with laboratories to falsify test results and cover up a salmonella outbreak, the latest fallout from a food-safety investigation that threw the country’s meat industry into disarray last year. BRF was already struggling to overcome surprise losses, management changes and a shareholders dispute that included a call to have the entire board removed.

“It’s on the way” to junk status, said Carlos Gribel, the head of fixed income at private investment bank Andbanc Brokerage in Miami, adding the bonds still have room to fall before becoming attractive to investors with an appetite for risk. “BRF had been facing poor results for a while, and was likely to lose its investment grade even before that scandal.”

The company’s $500 million of notes due 2026 slipped to 87.51 cents on the dollar this week, the lowest since they were issued two years ago, pushing the yield up to 6.26 percent. The bonds are down 8.7 percent this year, making them the worst performer among emerging market corporates.

The company declined to comment on the performance of its bonds or its credit ratings. BRF said in a statement that issues being investigated by police pose no health threat and that it follows all domestic and international regulations regarding food safety.

BRF’s credit metrics have dramatically deteriorated over the past two years, with net debt more than doubling since 2015 to 13.3 billion reais ($4.1 billion) after the company spent $1.3 billion in acquisitions to expand overseas while profits tumbled in its home country. Liabilities now correspond to 4.8 times earnings before interest, taxes, depreciation and amortization, up from from 1.3 times two years ago. About 9 billion reais in debt are due in 2018 and 2019, including 500 million reais in notes maturing in May, according to the latest financial statements.

The 2026 notes gained 0.3 percent as of 9:49 a.m. in New York to 87.77 cents on the dollar. The Brazilian currency rose 0.7 percent to 3.24 reais a dollar.

Moody’s Investors Service cut its grade further into junk territory Tuesday, keeping a negative outlook. BRF retains its investment grade from Fitch Ratings and S&P Global Ratings, though both have negative outlooks.

“The investigations, along with current discussions among shareholders, possible changes in the board of directors and management, will be a distraction,” Moody’s said in a statement March 6, also highlighting the company’s “weak credit metrics.”

BRF employees were altering samples in collusion with some laboratories to hide poor sanitary conditions and incidences of salmonella at levels above those set by certain importers, authorities said Monday, adding that knowledge of the fraud was widespread and reached the company’s management.

With the scandal set to hurt profits and as funding costs climb, the debt load will likely increase beyond 5 times Ebitda, Mizuho Securities USA said Thursday in a note to clients, adding its internal credit rating on BRF is now three steps below investment grade.

BRF, formed after Perdigao SA acquired larger rival Sadia SA in 2009 amid fallout from the global financial crisis, is Brazil’s biggest foodmaker, producing everything from fresh chicken to frozen lasagna. The company, which also exports poultry- and pork-based products to over 120 countries, has gone through deep changes since 2013, when Brazilian billionaire Abilio Diniz took over as chairman, pledging to make the $7.4 billion food giant leaner and more profitable. While the strategy paid off for a while, the producer posted a record loss in 2017, and now shareholders are seeking to remove Diniz and the entire board.

Only seven Brazilian companies still hold an investment-grade rating from at least two sources. The list also includes Braskem SA, Embraer SA, Fibria SA, Gerdau SA, Raizen SA and Vale SA.