RCL to exit euro debt that Foodcorp took on

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Johannesburg - The rand’s slide over the past year has persuaded RCL Foods, the country’s biggest chicken producer, to switch out of euro-denominated bonds into rand debt to ease the fallout from the currency’s decline.

RCL, which took on the foreign currency debt when it bought Foodcorp in 2012, planned to buy back e351 million (R5.27 billion) of bonds next month, the Durban-based company said earlier this month.

The yield on the euro notes, due in March 2018, has declined 45 basis points this year to 5.16 percent on Friday.

This compares with a drop of 166 basis points for similarly dated securities of Marfrig Alimentos, Brazil’s second-largest food maker.

“You’ve got a South African business generating revenue in rand and they’ve got to service debt in another currency,” Gavin Wood, the chief investment officer at Kagiso Asset Management, said. “It’s quite unpalatable. They have a currency mismatch and they’re now getting rid of this risk.”

RCL’s Foodcorp is redeeming the debt after the rand slid 15 percent against the dollar over the past 12 months, increasing debt costs.

Bondholders would be paid almost 1.1 times the face value of the debt plus unpaid interest on April 11, RCL said.

Buying Foodcorp, which supplies the large food retailers, broadened RCL’s range. RCL, formerly known as Rainbow Chicken, agreed to buy TSB Sugar in November last year to further diversify earnings.

“There was no provision for redemption of 100 percent of the notes until March 1,” Foodcorp’s chief financial officer, Ockert Janse van Rensburg, said last week.

Foodcorp sold eurobonds because its high debt ratios were not attractive to South African investors, he said.

The currency’s slide led to a R249m charge in the six months to December, RCL said last month.

“Through buying back the debt and refinancing it locally, we eliminated all currency risk and also associated costs involved in having such a complex financing structure on a foreign-listed bond exchange,” Janse van Rensburg said.

The company would fund the buy-back through a R4.5bn bridge loan facility and R1bn bank loan, it said last week.

Shareholders will vote by April 22 on whether RCL can pledge securities it holds in its subsidiaries as a guarantee.

“Naturally, it is good to have a diversified funding base,” Robin Hamro-Drotz, a money manager at Alandsbanken Asset Management in Helsinki, said last week.

“But especially in these times, it simplifies the company’s business and risk exposures,” Hamro-Drotz said.

At 5pm in Johannesburg yesterday, the rand was bid at R10.8745, down 3.83c from the same time on Friday.

By 8.50am the yield on the R186 benchmark government bond, due in December 2026, had risen 2 basis points to 8.62 percent.

RCL shares closed 1.27 percent higher at the day’s best level of R16 on the JSE yesterday. – Bloomberg


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