With demand for climate-friendly finance growing exponentially, Marfrig has entered the fray with a bond to support sustainable beef production. David Wigan reports.

Marco Spada

Marco Spada

Marfrig, the world’s second largest beef supplier, stepped onto shaky ground earlier in 2019 when it announced plans to issue a green bond. Investors wondered how a company that slaughters more than 33,000 cows a day could be green. In the end, the Brazil-based company made its case and printed a $500m, 10-year bond that was more than three times oversubscribed. In doing so, it contributed to the growth of a new asset class.

Marfrig is a relatively young company, which was founded in 2000 and went public in 2007, after which it entered a rapid period of expansion, mainly through acquisitions. Now it boasts revenues of $11bn a year and supplies some of the world’s biggest fast-food chains with beef.

In expanding quickly, the company accumulated a significant amount of debt, of which it has $3.5bn outstanding, about 86% of which comprises long-term obligations. Over recent years it has focused on liability management, selling some assets and aiming to extend maturities and reduce financing costs. Since 2013, it has reduced its leverage from 4 times to about 2.5 times (as of the end of 2018), with plans to bring it lower over time.

Transition bond

Marfrig issued two bonds in 2019. The first was a $1bn seven-year bond, with a coupon of 7%, sold in May. “At the end of July we returned to the market, this time for a milestone transaction,” says Marco Spada, vice-president of finance and investor relations at Marfrig Global Foods. “The first sustainable transition bond issued in Brazil, and a 10-year transaction for the first time for the company.”

A transition bond is a relatively new concept that helps companies unable to issue conventional green bonds. The pace of green bond issuance, which was on track to hit $250bn by the end of 2019 from almost nothing 10 years ago, is insufficient to meet demand, a gap in the market that bankers hope to fill with transition bonds.

Marfrig’s deal was the first so-called sustainable transition bond. Hong Kong power producer Castle Peak Power sold an energy transition bond in 2018, while Italian utility Snam did a similar climate action bond in February 2019.

Despite the ‘transition’ label, Marfrig’s proposed bond sale was not short of controversy. Beef production is considered to be the biggest contributor to deforestation globally, and in the eyes of many people, beef production and sustainability are mutually exclusive concepts. 

Certified sustainability

“The sector is seen as the ‘bad guy’ when we talk about Amazon deforestation,” says Mr Spada. “With this issuance, we were able to demonstrate to investors everything we have been doing on sustainability.” In May, Marfrig hired sustainability risk assessor Vigeo Eris to provide certification and third-party opinion for the bond and worked with BNP Paribas, ING and Santander to organise a non-deal roadshow for the company to meet face-to-face with investors.

“We spent a week in London and Paris talking to investors, providing details of what we do and how, about our presence in the Amazon biome and all the initiatives that we have launched to preserve it,” says Mr Spada. “We showed them that we acquire cattle only from suppliers that have best traceability practices in terms of preventing deforestation, animal welfare, and are strong on labour and human rights.”

Marfrig was the first company in the beef industry to undertake the Public Commitment on Amazon Cattle Ranching, which prohibits the sourcing of animals from deforestation areas, conservation units, indigenous land and areas blacklisted by the Brazilian Institute of Environment and Renewable Natural Resources; and from using slave labour.  

To ensure compliance, the company maintains a supplier monitoring platform, which uses a satellite geo-monitoring and geo-referencing system to keep an eye on the production processes and a supplier's social and environmental practices. Marfrig also uses real-time fire monitoring to reduce the risk of acquiring animals from areas affected by burning. Whenever there is any overlap of its properties and areas of fire, an alert is generated and procurement is halted until the situation has been clarified.

Best window

Having demonstrated its sustainable credentials to investors, the team was in no rush to issue the bond, preferring instead to wait for the best possible window.

“Our target was not the funding itself; rather our intention was to give the right message to investors,” says Mr Spada. “Given a strong market backdrop, we eventually opted to issue ahead of a crucial US Federal Reserve meeting.”

Initial price talk on the bond was set at a high 6% to 7% and on the morning of the sale there was no shortage of orders, with the book reaching $1.4bn two hours after opening. Bankers tightened guidance to 6.75% area plus or minus 12.5 basis points. The book kept growing and the $500m bond was eventually priced at 6.625%.

“We were very happy,” says Mr Spada. “It was historically the lowest yield paid by Marfrig in a transaction, and print levels reflected zero new issue concessions, with pricing flat to the curve.”

It was also vindication for the bankers and investors who believe that a sustainable future for beef is not an impossible concept.

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