Marfrig has staged an impressive turnaround in its financial profile over the past year, and the management of its outstanding debt has played a crucial role.
The Brazilian company conducted three liability management exercises between September 2013 and June 2014. As a result of those exercises, the company by mid-2014 had brought short-term debt down to 11% of the total, from 34% in early 2013, according to Marfrig’s chief financial officer, Ricardo Florence.
But the June deal, the exercise that wins this award, was in many ways the culmination of the process, being the largest liability management exercise the company has ever done. The repurchased instruments equaled more than 20% of the company’s net debt at the end of the first quarter of 2014, which stood at the equivalent of around $3.04 billion.
Marfrig was not the only Brazilian corporation to take advantage of good market conditions last year to refinance existing debt at cheaper prices. This deal was particularly successful, however, as the yield on the new bond was sharply lower than what the borrower had paid less than a year earlier.
Marfrig issued an $850 million, five-year noncall three bond in the liability management exercise, which targeted a 9.875%, 2017 bond and an 11.25%, 2021. It swapped the $663.4 million worth of bonds that were tendered into the new issue, at premiums to par — a cash price of 112 for the 2017 and 117.75 on the 2021. For the borrower to receive exchange accounting on the deal, HSBC was an intermediary, buying the debt from the market and swapping it with Marfrig for the new paper.
BTG Pactual, HSBC, Itaú BBA and Morgan Stanley were the bookrunners. Jones Day, Lefosse, Linklaters, Maples & Calder, and Pinheiro Neto gave legal advice.
After building an order book of around $5 billion for the new bond, the lead managers priced it at par to yield 6.875%. That was a sharp fall from the 11.5% yield the company paid in September 2013, when it sold its 2021 noncall five bond to yield 11.5%. “The market has started to perceive that there is a true story of change: delivering results quarter-on-quarter,” says Florence, pointing to increases in cash flow and Ebitda.
“A good approach with the investor community has helped, through investor conferences and nondeal roadshows,” Florence says.
Standard & Poor’s in October cited an improved liquidity and capital structure when it upgraded the company to B+. Just 18 months earlier, weak cash flow had prompted the agency and Fitch to cut Marfrig’s rating from B+ to B. “We had to change the perception of investors to deliver result,” says Florence.
Since 2013, Marfrig has embarked on what Florence calls a multiyear deleveraging story, with the debt management exercises backed by steady improvements in cash flow, driven in part by more careful management of expenses in the company’s individual business units. “We were burning cash in previous years,” he says. “We’ve concentrated on becoming a leaner, more stable company.” LF