Batista Bonds Worst in Emerging Markets on JBS Debt Concerns

(Bloomberg) -- After more than a year of police investigations involving JBS SA, bond investors in the world’s largest meatpacker have finally found a problem too big to ignore.

The company’s $750 million in notes due in April 2024 lost almost 18 percent in four sessions after one of biggest newspapers in Brazil reported late May 17 that Joesley and Wesley Batista, the brothers who run the company, admitted to bribery and other crimes in a plea deal with prosecutors that implicated several high ranking government officials.

While they rebounded 7.5 percent Wednesday, the bonds are still the second worst performers among emerging-market corporate notes since the scandal broke, trailing only the plunge in Eldorado Brasil Celulose SA, a pulp producer also controlled by the Batista family.

The plea bargain, which sent shudders through Brazilian markets on concern it would derail President Michel Temer’s efforts to shore up the country’s finances, initially seemed beneficial for JBS. The deal meant no prison time for the brothers, and the fine the executives agreed to pay was small enough to eliminate the risk they’d have to raise capital by selling shares. But concerns are now mounting about how much JBS will have to pay as prosecutors consider fines against the company itself, according to Revisson Bonfim, a managing director at Stifel Nicolaus & Co. in New York.

"It is different this time," he said, adding that he has been getting more and more calls from worried investors. The pressure will likely continue until JBS can reach its own leniency deal, Bonfim said.

JBS, its holding company or executives have been mentioned in six different investigations in Brazil in the past year. Wesley and Joesley -- the chief executive officer and chairman -- briefly stepped down following a court order, and the headquarters building for the group in Sao Paulo has been searched by police on two separate occasions. The Batistas, who built an empire out of beef, pulp and banking, aren’t related to Brazil’s former billionaire Eike Batista.

Operations are running normally and its financial situation is “robust,” the company said late Monday after shares plunged a record 31 percent. The company didn’t immediately respond to a request for further comment on its financial conditions.

J&F Investimentos, the Batista’s holding company, hasn’t reached a leniency deal with Brazilian prosecutors, who are asking for 11.2 billion reais ($3.4 billion) in fines and penalties to be paid over 10 years. J&F is proposing a fine of 1 billion reais, according to prosecutors, and is in settlement talks. Law firm Baker & McKenzie LLP was hired by JBS to negotiate a leniency agreement in a separate but related investigation by the U.S. Justice Department.

Potential fines and other actions against the company, and concern that banks will restrict credit, led Fitch Ratings and Moody’s Investors Service to cut JBS’s rating for the first time since 2013 while putting the classification under review for further downgrades.

JBS had 47.8 billion reais in debt at the end of the first quarter, the equivalent to 4.4 times its earnings excluding some items. Short-term debt accounts for about a third of that and is mostly related to trade financing operations, according to the latest financial statement. Increased reputation risk could reduce access to funding, constraining JBS’s ability to repay obligations through 2021, Bloomberg Intelligence analysts Damian Sassower and Alexander Graf said in a note.

“It’s now a momentum trade,” said David Tawil, the president and co-founder of Maglan Capital in New York. “It has nothing to do with fundamentals.”

--With assistance from Fabiana Batista

To contact the reporter on this story: Gerson Freitas Jr. in São Paulo at gfreitasjr@bloomberg.net.

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Julia Leite, Brendan Walsh