JBS SA (JBSAF, Financial) (BSP:JBSS3, Financial), a once-highflying Brazilian meat packing company, experienced a sharp decline in its stock price last Tuesday. The latest 10% decline is just the tip of the iceberg as JBS shares have already declined 41% these past few trading days. It seems investors are trying to get out as the company is in the midst of a corruption scandal in Brazil.
Backed by prosecutors who have recordings as evidence, reports started circulating that JBS' owners Wesley and Joesley Batista bribed Brazilian politicians. The revelation further implicated Brazilian President Michel Temer, with many calling for his resignation.
JBS also issued dollar debt, also known as bonds. The company's bonds have been sold off for four days in a row. Last week, the company's 10-year bonds were sitting at $1.04. Now they are being traded at 89 cents, a 15% drop since last week. On the upside, the yield of the bonds shot up to 11.67%.
Fitch downgraded JBS' profile to BB from the previous rating of BB+. According to an analyst from Fitch, JBS' executives are striking a plea bargain deal. While the executives may not receive the full blow, the company's reputational risk is likely to increase. As a result, the company will have reduced access to additional funding, which will greatly hamper its ability to repay $18.1 billion of short-term debt.
Moody's perception of JBS also mirrors Fitch's, resulting in a downgrade from BB+ to BB last Monday. Moody's main concerns are related to liquidity.
Approximately 75% of JBS' short-term debt is wrapped in trade finance loans, which usually mature in six to 12 months. Banks will readily renew the debt, however, depending on the company's ability to export goods
JBS was largely unknown outside of Brazil until recently. The company started out as a small butcher shop, processing only five cows a day.
With the backing of Brazil's development bank, a major shareholder and lender of the company, JBS started to grow rapidly through acquisitions. The company acquired Swift & Co., Smithfield Foods' beef business and Pilgrim's Pride (PPC, Financial), becoming the largest "protein" company in the world.
Recently, rising beef prices together with the strong U.S. dollar allowed the company to acquire Primo Group, the largest bacon and ham producer in Australia. JBS also purchased poultry assets from Tyson Foods (TSN, Financial).
JBS' stock price peaked around $17.56 in September 2015. Last Tuesday, the stock drastically dropped to $5.79 a share. At its peak, it was one of the few large companies in Brazil that was excluded from the Petrobras corruption probe, which is why its shares started to soar. JBS also planned to expand into other realms such as the Vape industry. However, due to the company's situation, no one knows if it will push through.
Disclosure: I do not own any shares of any stocks mentioned in this article.
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