SAO PAULO, BRAZIL — Shares of JBS S.A. plunged May 22 amid a widening scandal in Brazil and after the announcement that seven JBS executives and its controlling entity, J&F Investimentos, have entered into a plea agreement with the Federal Public Prosecutor’s Office in Brazil.
The developments appear to have eliminated the possibility JBS will conduct an initial public offering in the United States any time soon. Planned for the first half of this year, the I.P.O. was temporarily delayed by JBS earlier in May, days before the latest revelations about the company.
Responding to the news, JBS shares on May 22 plunged R$2.73 reals, or 31%, to R$5.98 reals ($1.83) in trading on Brazil’s stock market. Over the course of the day, the company lost $2 billion in market value.
While JBS has been under investigation for some time, news accounts in recent days have implicated the company’s top executive Joesley Batista in the payment of Brazil’s president Michel Temer and his predecessors millions of dollars in bribes. At the time JBS filed for its I.P.O. last year, members of the Batista family owned 44.5% of JBS shares.
Fighting calls for his resignation, Mr. Temer on May 20 accused Mr. Batista of insider trading in currency, selling the Brazilian real before video testimony was made public in connection with the plea agreement.
The company has denied Mr. Temer’s charges.
“JBS has a policy of using financial protection instruments with the sole objective of minimizing currency and commodities risks associated with its debt and U.S. dollar receivables,” the company said. “In light of JBS’ exposure to the U.S. dollar, an example of a potential impact from that currency’s fluctuation is that, when considering the exchange rate variation from R$3.16 on March 31 — closing of the first quarter — to R$3.40 on May 18, without hedging JBS would have incurred a loss greater than R$ 1 billion.”
Officials in Brazil said probes into the currency transactions are likely to be initiated.
Based in Sao Paulo, JBS S.A. is the world’s largest protein company as measured by revenues, slaughter capacity and production. The company is the top beef and poultry producer, is a leading lamb producer and in the United States is the second largest pork producer.
Under its plea agreement, which JBS said was ratified by Brazil’s Supreme Court, the seven executives involved in the case will pay fines totaling R$225 million and will cooperate with the public prosecutor’s office “regarding all matters disclosed to the authorities, among other obligations.” The company said it would issue further updates as appropriate.
From the company, prosecutors are seeking payment of R$11.2 billion reals ($3.4 billion) over 10 years as part of a leniency arrangement.
Backlash against developments at JBS extended beyond the Brazilian stock market. Moody’s Investors Service, New York, downgraded JBS S.A. and its U.S. subsidiary JBS USA Lux S.A. to Ba3 from Ba2, placing both entities under review for further downgrade. The company’s high debt levels place JBS in a potentially precarious position, Moody’s said.
“The ratings downgrade reflects increased risks related to potential future litigation cases, governance of the company, and liquidity, on which there is currently limited visibility,” Moody’s said. “These risks, in addition to JBS S.A.'s high financial leverage, warranted an immediate one-notch downgrade. The review process will focus on obtaining further details about the disclosed settlement along with information about any ongoing criminal investigations, including potential fines, executives involved, other possible liabilities and ramifications.”
In considering a further downgrade, Moody’s said it will be watching for signs of additional liquidity deterioration in connection with the legal developments.
In 2016, JBS undertook a massive reorganization in connection with the initial public offering of shares on the New York Stock Exchange. The company placed all of its assets except its Brazilian beef business in a new holding company — JBS Foods International N.V. Under the plan, the Brazilian beef business would continue to trade on Brazil’s stock market.
JBS has become a U.S. protein powerhouse over the last 10 years, acquiring Swift & Co. in 2007, National Beef Packing Co. and Smithfield Beef Group, Inc. in 2008, 65% of Pilgrim’s Pride Corp. in 2009 and the Cargill Meat Solutions Corp. U.S. pork business in 2015.In connection with the I.P.O., company executives expressed the belief the company’s restructuring and N.Y.S.E. listing would give the company better access to capital than it would in Brazil, which had been beset by severe economic and political turmoil even before the latest developments at JBS.