The question remains: is Marfrig the Brazilian-version of Enron?


The research firm Empiricus continues to point out inconsistencies (here and here) in Marfrig’s accounting, and this time it went a step further: last Friday it sent out a letter with its questioning on Marfrig’s statements to the SEC. Yes, the SEC. In addition, it released two additional addenda raising further accounting issues (here and here). Empiricus claims that Marifrg has been opportunistically using the IFRS accounting standards transition as an excuse to hide liabilities of more than R$1 Billion.

Here is its full letter to the SEC:

“Empiricus is a Brazilian Independent Research House. I am Marcos Elias, founder of the company. Marfrig is a meat and beef processing company, having issued ADR level I. Our research team has promoted a tour de force, an in-depth analysis of Marfrig’s current and past balance sheet, nailing down several inconsistencies. These were put down in a form of an Open Letter. Company refrained from answering the letter, besides providing to public a small declaration – argumentum ad verecudiam – alleging to be a well reputed listed company audited by KPMG. KPMG has also provided a public note declaring it will not address the supposed accounting inconsistencies due to confidentiality agreements and loyalty issues with the client. In the next few days we will keep the pace, making addenda to our open letter, as our internal auditing squad piles up more inconsistencies.

We hope to get answers from the company in a written form, openly, in order to avoid distortions and misunderstandings. As of today, Marfrig is collecting tens of public questionings over its accounting practices that can be accessed at CVM’s Brazilian SEC. Discrepancies amounts to over R$ 1 billion, if we only take 2010 fiscal year. Our understanding is that the company deliberately understated its debt to EBITDA, EBITDA to interest and debt to book value ratios to mask covenants blew up, and it should republish current and past balance sheets.

Additionally, anedoctal evidence shows the company opportunistically used the IFRS accounting transition to hide liabilities. Given Empiricus’ findings over accounting inconsistencies detected over several financial statements of Marfrig (MFRG3) – which are being made public to clients through open letters and annexes (no answers so far from the company or their auditor, KPMG) – and considering the vast amount of different investigations held by Brazilian’s SEC CVM over the theme on Marfrig (enter www.cvm.gv.br, then go to “consulta a processos”, type “Marfrig” in the field “Requerente/Interessado” and more than 20 internal proceedings will pop up, some under the title “noncompliance detected”), we are confident over the scenario of our SEC demanding 2009-2011 financial statements to be restated. Restatement of balance sheets will lead to debt covenants blow up (for instance net debt to ebitda should be no greater than 4,75%, for a bond of R$ 2,5B issued in 07/15/2010), triggering early redemption of almost R$ 6B in bonds.

If it happens, Marfrig won’t be able to meet its obligations (since it burns cash operationally and holds less than R$ 2,5B in total cash for a financial debt piling up to R$ 15B), and it will default. So, in my opinion, Marfrig’s solvency (and liquidity for the whole value chain) is being held by a threat, that will stand if authorities does not demand FS restatements”.
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