Scandal-Plagued JBS’s Bond Woes May Be a Buying Opportunity

(Bloomberg) -- Bond investors are punishing JBS SA after the world’s biggest meat producer was ensnared in at least three investigations in the past year.

But to Maglan Capital and Quesnell Capital SA, the swoon may be one of the best opportunities to turn a quick profit on the company’s debt.

JBS’s $7.1 billion of notes have tumbled 4 percent since Monday, when Brazilian police raided the offices of parent J&F Investimentos SA as part of a probe into alleged pension-fund fraud. In January, JBS’s notes also sank when a prosecutor accused Chairman Joesley Batista of financial crimes involving a series of loans to related companies. Two months earlier, a federal audit court said it found evidence JBS received “special treatment” from state-run development bank BNDES and expanded its probe. 

Despite JBS’s seemingly never-ending legal problems, its notes have managed to bounce back each time. The company has sidestepped the slump in Brazil’s economy because more than 80 percent of its sales are in dollars and include revenue from Pilgrim’s Pride Corp., the U.S.-based poultry company it controls. JBS now has major operations on four continents, making it one of the world’s biggest food companies. 

“There are valuable assets behind all of these companies -- they are behemoths,” said David Tawil, co-founder of New York-based hedge fund Maglan Capital. “I don’t see anything particularly alarming on a relative basis in this investigation. And with respect to its industry, JBS is too big to fail. It’s the largest meat processor in the world.” 

The police searched the offices of J&F Investimentos and those of its pulp and paper producer, Eldorado Brasil Celulose SA, early Monday, a press officer said. It was the second time Eldorado was raided since June, when it first sold bonds. 

In a statement, J&F said two of Brazil’s largest pension funds invested 550 million reais ($171 million) in Eldorado in 2009 and owned a stake valued at 3 billion reais as of December 2015. Wesley Batista, JBS’s chief executive officer, accompanied police to give testimony in the investigation after the search, the press official said. His brother Joesley Batista was out of the country, the official added.

The market value of bonds sold by JBS and Eldorado has plunged by $317 million since Monday, according to data compiled by Bloomberg. The yield on JBS’s $1 billion of notes due in October 2020 fell 0.34 percentage point to 6.36 percent as of 1:33 p.m. in New York.

“The market selloff looks to be the making of an interesting opportunity,” said Ian McCall, a money manager at Quesnell, whose fund is outperforming 91 percent of its peers in the past month. “I see them surviving and with the price of their bonds having been beaten up, that is exciting and interesting as an investor.”

He said he’s bought Eldorado bonds during the slump and is looking to buy more. In JBS’s case, McCall said he’s following the “situation closely with a view toward acting.”

“Both of these are very large companies, important players in their respective markets that have staying power beyond any fines they may face from the alleged misconduct,” he said.

--With assistance from Gerson Freitas Jr. To contact the reporters on this story: Paula Sambo in Sao Paulo at psambo@bloomberg.net, Filipe Pacheco in Dubai at fpacheco4@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Michael Tsang at mtsang1@bloomberg.net, Lester Pimentel