Marfrig upsizes seven-year bond after getting US$2 billion in orders

Brazilian beef producer Marfrig was set to price an upsized US$750m seven-year non-call three bond at a yield of 8.25% on Wednesday after amassing a book of over US$2bn.

Marfrig, which also has assets in the US, had been expected to win favor among investors despite the country's economic slump hurting its bottom line.

It was also seen as a direct beneficiary of increased optimism for the Brazilian economy after the start of an impeachment process against former president Dilma Rousseff and appointment of a market-friendly administration.

Leads set a final yield on Marfrig's bond (rated B2/B+/B+) at 8.25%, the tight end of guidance of 8.375% (+/-12.5bp) and within the earlier IPT range of low to mid 8s. They also upsized the deal from US$500m.

An improved market tone also helped. Latin American debt markets were looking up on Wednesday as crude neared US$50 a barrel and Brazil's Congress approved the government's new fiscal target - a legislative victory for newly appointed president Michel Temer.

Calculating a new issue premium was difficult given that much of the company's underlying bonds have been targeted in buy backs or were trading on a yield-to-call basis.

Yields on Marfrig's most recent issue - a 6.875% 2019 that was sold in June 2014 - were quoting below 7% this week, down from a year-to-date high of 10.68% in early January, according to Thomson Reuters data.

"I think fair value is around 8% or less," said an analyst looking at the existing 2019s.

Investors and bankers also looked at rivals JBS and Minerva as comps, despite their higher ratings of Ba2/BB+/BB+ and B1/BB-/BB-, respectively.

At 8.25%, Marfrig's new seven-year bond is coming about 150bp back to the JBS curve, whose 6.25% 2023s, 7.25% 2024s and 5.75% 2025s are somewhat inverted at 6.88%, 6.59% and 6.50%, according to Thomson Reuters data.

Minerva meanwhile has 7.75% 2023s trading at 7.35%.

"Minerva is better rated, but Marfrig also has good liquidity and a high cash balance," said a credit analyst.

As of March 31, the group held some R$5.2bn (US$1.44bn) in cash and marketable securities against R$2.2bn in short-term debt, according to Fitch.

The bond, led by BB Securities, Bradesco BBI, HSBC, Morgan Stanley and Santander, is part of a debt buyback targeting 9.625% 2016s, 9.875% 2017s, 8.375% 2018s and 9.50% 2020s.

Marfrig's net adjusted debt/Ebitda stood at 3.5 times as of March 31 after the company sold its UK unit Moy Park to rival JBS for US$1.5bn, using the proceeds to pay down debt.

It is expected to do the same through the recent sale of Argentine assets for around US$75m.

Fitch, which assigned a B+ rating to the new issue, expects leverage to drop further this year, partly thanks to lower interest payments.

Bankers expect more Brazilian corporates to tap international debt markets after Marfrig's bond which followed a US$6.75bn five and 10-year offering from state-controlled oil company Petrobras last week.

The Petrobras deal was the first Brazilian corporate issuer to tap the international bond market in close to a year.