Pockets of Credit Risk Still Present Across Brazil

By CreditRiskMonitor

Brazil's political corruption scandal has found its way into many executive suites. This ongoing challenge adds to the business headwinds from the country's three-year economic contraction. Debt-laden JBS SA (BVMF: JBSDD3), one of the largest meat processing operators globally, recently sold foreign assets for net proceeds of 960 million Real. Brazilian courts, in an added twist, recently found corruption involvement within its management team, a major overhang for the company.

It’s important to assess how much credit risk is attached to a company with which you plan on doing business.  That effort takes on extra importance when dealing with an unstable political environment, like the one in Brazil. CreditRiskMonitor offers worldwide coverage of public companies, which includes business credit reports and timely news alerts.

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A Meaty Problem?

In June 2017, JBS SA's FRISK® score dropped from a "6" to a "3," indicating a significant deterioration in the company's risk profile. The FRISK® score is a risk management tool that provides users with an early warning signal of business financial distress.

One model component of the FRISK® score is market sentiment which began signaling heightened risk due to rising stock price volatility in May of 2017. JBS' liabilities to market capitalization ratio also pushed over a painful four times, another negative signal. The FRISK® score was adversely impacted later in the summer of 2017 by Moody's lowering JBS' long term credit rating from Ba2 (BB) to B2 (B). This change effectively degraded the meat processor's credit rating from the speculative to highly speculative risk category. Subscribers can actually see this deterioration in real-time since the FRISK® is updated daily.

Digging deeper on financials, JBS has a considerable amount of debt on its balance sheet and is currently refinancing its short-term maturities. This strain helps explain its recent asset sales, but overall net debt is still high at approximately $47.8 billion Real by the end of the first quarter.

Below are two financial metrics that specifically address JBS' debt servicing ability:

JBS' annualized free cash flow generation appears low, relative to existing debt. The company's interest coverage ratio, meanwhile, has fallen below two times. Considering both of these measures, counterparties should be carefully monitoring JBS' financial health.

The other two primary meat processing operators in Brazil are Minerva SA (BVMF: BEEF3) and Marfrig Global Foods (BVMF: MRFG3). Unfortunately, their credit profiles don't look much healthier as each company maintains a FRISK® score of "4," as of August 1, 2017. That said, JBS SA's falling FRISK® score suggests that not even the largest operators in a given industry are insulated from the credit risks circulating in Brazil.

Your Portfolio

To help track risks like these, subscribers have the ability to create a portfolio to follow multiple companies in real-time. Below we created a small portfolio of food processing companies, including the above meat processors, all of which are based out of Brazil: 

A commercial creditor or purchaser can use this layout to assess relative financial risk among public companies with which they might do business. This quick view can highlight which companies are risky and which are not. As a rule of thumb, the high scores, coded in green and blue, are typically good considerations whereas the low scores, in the red category, should be analyzed more critically.

The Takeaway

The Brazilian economy has yet to fully rebound and political corruption remains a complicated stressor across many of its industries. The JBS example is quite noteworthy, but the company's financial problems are hardly unique. While the country specific risks in Brazil will not last forever, we think it is important to closely track the most troubled companies in this country. CreditRiskMonitor provides a wide breadth of public company coverage across Brazil, totaling hundreds of operators. The FRISK® score isn't limited to addressing your riskiest counterparties either as it also identifies businesses (which could be your alternate suppliers or customers) that are financially healthy.

Discover the biggest risks in your portfolio: GET IN TOUCH FOR A PERSONALIZED RISK ASSESSMENT

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The FRISK® score is calculated by a proprietary model that measures the degree of financial distress for a public company. The model has been back-tested over the last decade to predict 96% of US public company bankruptcies. The score is enhanced by our subscriber base through crowdsourced behavioral data patterns. Provided below is the scoring chart that displays the statistical probability of bankruptcy within the next twelve months for each score category:

The FRISK® Stress Index is a model that provides the average probability of failure for a group of companies (e.g. by industry, portfolio, or country) over the next 12 months. The level of risk is measured through a scale of “0” to “50,” with “50” being the most risky.