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Lula Subsidies Mean JBS Bond Yields Narrowest to Tyson Debt in Six Months

Brazilian state financing to JBS SA, the world's largest beef producer, is driving the company's borrowing costs relative to Tyson Foods Inc., the biggest U.S. meat producer, to the lowest level in six months.

The yield gap between JBS's 11.625 percent notes due in 2014 and Tyson's 10.5 percent bonds maturing the same year narrowed to 183 basis points, or 1.83 percentage points, this week, the smallest since Jan. 20, according to data compiled by Bloomberg. The difference may narrow to about 100 basis points in the next six to 12 months, said Eric Ollom, chief emerging- markets strategist with Jefferies & Co. in New York.

The state development bank, known as BNDES, provided about $2 billion of financing to Sao Paulo-based JBS this year, helping pay for acquisitions including an $800 million purchase of Pittsburg, Texas-based Pilgrim's Pride Co. JBS posted a first-quarter profit of 99.4 million reais ($56 million), reversing a year-earlier net loss of 322.7 million reais, after BNDES helped it finance 14 acquisitions in four years.

"The support JBS has from BNDES is the best in Brazil, and it improves the credit a lot," said Vinicius Pasquarelli, a broker with Tradition Asiel Securities Inc. in New York.

The yield on JBS's $700 million of 2014 bonds tumbled 86 basis points this month to 7.19 percent, the lowest since May 2010, data compiled by Bloomberg shows. Yields on Tyson's $810 million of notes dropped 34 basis points since the end of June.

Rating Upgrades
Fitch Ratings raised JBS to BB-, three levels below investment grade, from B+ yesterday. Standard & Poor's boosted its rating on the company by two levels to BB last week, putting it in line with Tyson. JBS's 64 percent stake in poultry producer Pilgrim's Pride and its acquisition of Sao Paulo-based meatpacker Bertin SA will bolster cash flow, S&P said in a statement.

"The differential should be a lot less than where the market spreads are," Ollom said.

President Luiz Inacio Lula da Silva orchestrated a 41 percent surge in BNDES lending in the first five months of the year to a record 46 billion reais as he sought to strengthen the country's economy recovery. BNDES, based in Rio de Janeiro, offers borrowers subsidized loans. Its key rate, known as TJLP, is 6 percent, or 475 basis points below the central bank's 10.75 percent benchmark lending rate.

BNDES bought 99.9 percent of JBS's offering of $2 billion mandatory-convertible debt offering, according to a Feb. 5 company filing. A BNDES spokesman declined to comment.

While spreads on JBS bonds have narrowed, the average yield gap on Brazilian corporate dollar bonds over U.S. Treasuries climbed 106 basis points to 333 from a 2 1/2-year low on April 5, according to JPMorgan's CEMBI index. It rose two basis points yesterday.

Rate Increase
The extra yield investors demand to hold Brazilian government dollar bonds instead of U.S. securities rose six basis points to 226 yesterday, according to JPMorgan.

Yields on Brazil's interest-rate futures contract due in January was unchanged at 10.97 percent before a policy meeting in which central bankers raised the benchmark overnight rate 50 basis points from 10.25 percent. The real fell 0.4 percent to 1.7808 per dollar.

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps was little changed at 123 yesterday, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Marfrig Bonds
JBS's acquisitions, financed by BNDES and a 1.6 billion reais share sale in May, will add 3.3 billion reais of earnings before interest, tax, depreciation and amortization to JBS's balance sheet, according to a July 21 report by Fitch. The company's net debt to EBITDA was 3.3 as of March 2010 and should decline to 3 in 2011 because of rising earnings, Fitch said.

Tyson, based in Springfield, Arkansas, had net debt to EBITDA of 1.3 at the end of the second quarter, according to data compiled by Bloomberg.

Gary Mickelson, a Tyson spokesman in Springfield, declined to comment.

Marfrig Alimentos SA, Latin America's second-largest beef producer, said earlier this week that BNDES may buy all of the 2.5 billion reais of convertible bonds the company plans to sell to finance acquisitions.

Industry 'Survival'
"It is the government's support of the sector, through BNDES that has been instrumental to the survival and growth of the beef sector," said Esther Chan, who helps manage $5 billion of emerging-market assets at Aberdeen Asset Management Plc in London. "With JBS, before investors were worried about their ability to carry out the acquisitions in new markets and manage the business effectively."

JBS plans to sell $400 million of bonds due in 2018, according to Fitch. The company may issue the securities as soon as this week, according to people familiar with the transaction who declined to be identified because terms aren't set.

Vanessa Esteves, a spokeswoman for JBS in Sao Paulo, declined to comment on the bond sale.

"JBS has the support from BNDES," Pasquarelli said. "They are going to continue to have this support."