OREANDA-NEWS. Fitch Ratings has affirmed Minerva S. A.'s (Minerva) Long-Term Foreign and Local Issuer Default Ratings at 'BB-'. The Rating Outlook remains Stable.

Fitch has also assigned a 'BB-(EXP)' rating to Minerva S. A.'s (Minerva) proposed issuance of global notes. The proposed senior unsecured notes will mature in 2026. The notes will be issued through its wholly owned subsidiary, Minerva Luxembourg S. A. (Minerva Lux) and will be irrevocably guaranteed by Minerva. Proceeds will be used to refinance existing debt and for general corporate purposes.

In conjunction with these actions, Fitch has upgraded the national scale rating of Minerva to 'A (bra)' from 'A - (bra)'. This rating action reflects Minerva's improvement within the 'BB-' rating level due to lower leverage, which has resulted from increased EBITDA and cash proceeds from a BRL741 million capital injection from Salic (UK) Ltd.

Declining Net Leverage

Fitch expects Minerva's net debt/EBITDA ratio to be around 3.0x in 2016, compared to 4.2x during 2015. As of June 30, 2016, the company's total debt/EBITDA remained high for the rating level at 5.2x. The improvement in net leverage is due to positive free cash flow (FCF) and the capital injection.

Improving Revenues and EBITDA

Minerva's revenues and EBITDA were affected positively by the full integration of past acquisitions, increased export sales and ability to implement cost efficiency measures. Minerva enjoyed higher prices for fresh beef in the domestic market due to its strategy of optimizing distribution channels and focusing on food service and small and medium retailers. As of the LTM ended June 30, 2016, the company reported net revenues and EBITDA growth of 14.4% and 36.6%, respectively, while EBITDA margin increased by 200bps to 11.5% compared to the same period last year.

Cash Flow Turns Positive

Fitch expects Minerva's FCF after interest expense to improve to more than BRL250 million in 2016 from BRL34 million in 2015. The improvement will be driven by a reduction in capex as investments in recently acquired plants taper off. The ramping-up of these assets, particularly those in Colombia, should improve capacity utilization levels and dilute fixed costs. These transactions are likely to enhance the company's geographic diversification but not its product diversification.

Improving Industry and Domestic Outlook

Cattle prices are projected to soften in Brazil during 2017 as the availability of cattle for slaughter increases. The herd size is at a record level of nearly 220 million head. Positively, Brazilian beef producers continue to have access to more export markets. In May 2015, mainland China approved Brazilian beef imports and in August 2016 the United States agreed to open its market to Brazilian beef, which will boost demand from 2016 onwards and should facilitate the opening of additional markets for Brazilian beef producers. Furthermore, it appears that the Brazilian market is close to reaching a bottom from an economic perspective, which should lead to more favorable domestic demand dynamics.

Product, Country Concentration Risks

Minerva is less diversified from a product and geographic position than the two other large protein companies based in Brazil, JBS S. A. and Marfrig S. A. About 69% of Minerva's slaughtering capacity is located in Brazil, 13% in Uruguay, 13% Paraguay and 5% in Colombia. With its large export presence, the company's profitability is also closely tied to exchange rate variations. Among the significant risks faced by the company are a downturn in the economy of a given export market, the imposition of increased tariffs or sanitary barriers, and strikes or other events that may affect the availability of ports and transportation. Minerva's export revenues represent 68% of total revenues.

KEY ASSUMPTIONS

--Middle single digits revenues growth boosted by volume growth in beef division exports (6%), and stable volumes and higher prices in domestic market compared to 2015.

--Stable and sustained EBITDA margins going forward;

--Positive FCF;

--Adjusted net leverage below 3.0x in 2016, deleveraging going forward;

--No Dividends payment in 2016.

RATING SENSITIVITIES

Positive Rating Triggers: An upgrade could be triggered by additional geographic and product diversification, continuous positive free cash flow generation and substantial decreases in gross and net leverage to below 4.5x and 3.0x, respectively, on a sustained basis.

Negative Rating Triggers: A negative rating action could occur as a result of a sharp contraction of Minerva's performance, increased net leverage above 5x on a sustained basis as a result of either a large debt-financed acquisition or asset purchases, or as a result of a severe operational deterioration due to disruptions in exports.

LIQUIDITY

Minerva's liquidity remains adequate as of June 30, 2016; liquidity is supported by BRL2.7 billion of cash and cash equivalents while short-term debt totals BRL1.3 billion. Around 23% of debt is short term. The main debt repayment is due in 2023 (BRL2.8 billion). Approximately 84% of total debt was exposed to foreign exchange variation.

FULL LIST OF RATING ACTIONS

Fitch has taken the following actions on Minerva:

Minerva:

--Long-Term Foreign & Local Currency IDR affirmed at 'BB-'; Outlook Stable;

--National Long-Term Rating upgraded to 'A(bra)' from 'A-(bra)'; Outlook Stable.

Minerva Luxembourg S. A.:

--Senior unsecured notes due 2017, 2019, 2022, 2023 and perpetual affirmed at 'BB-';

--Senior unsecured notes due 2026 rated 'BB-(EXP)'.