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Announcement:

MOODY'S CONFIRMS B1 RATING OF MARFRIG; OUTLOOK STABLE

 The document has been translated in other languages

09 Nov 2010

Approximately $875 million of Rated Debt Securities Affected

Sao Paulo, November 09, 2010 -- Moody's Investors Service confirmed the B1 ratings of Marfrig Alimentos S.A.'s ("Marfrig"). The rating outlook is stable. This rating action concludes the review process that was initiated on 16 June 2010 when Moody's placed Marfrig's ratings under review for possible downgrade.

The rating confirmation is based on the conclusion of the acquisition of Keystone Foods, LLC and the determination that the mandatory convertible debentures that were issued to finance the acquisition have been deemed to have full equity treatment. The confirmation also reflects our view that the combined entity will have an enhanced business profile through a diversified product portfolio and improved international distribution capabilities. While the profit margin of the combined entity may be lower the stability of the business should be enhanced with the acquisition.

Ratings confirmed with a stable outlook:

Issuer: Marfrig Overseas Limited and guaranteed by Marfrig:

- USD 500 million 9.500% senior unsecured guaranteed notes due 2020: B1 (foreign currency)

- USD 375 million 9.625% senior unsecured guaranteed notes due 2016: B1 (foreign currency)

- Corporate Family Rating: B1 (Global scale)

Moody's had placed Marfrig's ratings on review for possible downgrade on 16 June 2010 following its agreement to acquire 100% of Keystone Foods LLC's (Keystone) stock for a total of USD 1.26 billion. Moody's has reviewed the details of the transaction and considered that the 5-year mandatory convertible BRL 2.5 billion debenture used to finance this acquisition should be treated as 100% equity, in accordance with "Moody's Revised Update on Rating Debt Obligations with Variable Promises" (published in July 14, 2010). BNDES Participações S.A. "BNDESPar" was the sole subscriber to the issuance. BNDESPar (A3 -- Long Term Issuer Rating -- Domestic Currency) is the equity investment arm of the national development bank of Brazil and owned 13.8% of Marfrig prior to this transaction. BNDESPar's ownership in Marfrig might increase to 35% when the debentures convert to equity in 2015. The Keystone transaction closed on Oct. 1st. 2010.

Moody's rating action considers the potential synergies that could arise due to the larger scale and global distribution capabilities of the combined company. Keystone has a number of distribution facilities in Asia and the Middle East which will give Marfrig an excellent platform to increase its sales in these fast growing emerging markets. Keystone is a global supplier to McDonald's (A3 / Prime-2 - Ratings Under Review for possible upgrade) and with the acquisition of Keystone, Marfrig's relationship as a global supplier to McDonald's will further strengthen. "This high percentage of sales to McDonald's does represent concentration risk although mitigated by the length of this relationship and the growth opportunities that this offers Marfrig in fast growing emerging markets" said VP -- Senior Analyst Ricardo Kovacs. The operating margins of Keystone are lower and interest expenses will increase due to the cost of financing of the acquisition. As a result, we expect certain credit metrics such as EBITDA margin and interest coverage to decrease in the short term before synergy gains from the transaction take effect. Although low, operating margins at Keystone have been historically more stable and cash from operations have been positive.

The rating action recognizes the challenges that Marfrig will face in order to successfully integrate Keystone into its global business. The purchase of Keystone follows the purchase of Seara Alimentos S.A's in January 2010. Harmonizing the operations of three large and diverse companies will entail operational risks and integration challenges, including the management of much broader global business.

Despite the latest suspension of purchase of industrialized Brazilian meat by the US, the longer-term prospects for the segment continue to be firm as Brazil is one of the lowest cost-producer of beef in the world. Now, higher domestic cattle prices are squeezing operating margins in the beef sector. Further strategic consolidation should lead to improved economies of scale where a large player as Marfrig would benefit.

The stable outlook reflects our view that going forward Marfrig will concentrate on consolidating the acquired businesses and larger assets under management. The outlook also reflects our expectation that the company will move towards positive free cash flow towards the end of 2011. Achieving synergies and transforming them into enhanced operational metrics would be a positive rating driver. We expect the EBITDA margin and interest coverage ratios to decrease in the near term before increasing in the latter parts of 2011 and beyond. Since we are considering the mandatory convertible debentures of BRL 2.5 billion as equity and not debt, leverage is likely to decline moderately (Marfrig will assume approximately USD 450 million in outstanding debt).

Evidence of continued improving operating performance and positive cash generation essentially at its Brazilian operations and an improvement of its liquidity situation, would be positive for Marfrig's ratings. Quantitatively, upward pressure on the ratings could come from a Debt / EBITDA ratio of below 4.0 times, EBITDA margin above 12% and CFO / Net Debt of 20%, as well as ability to generate free cash flow / Net Debt of 2%, on a sustainable basis.

On the other hand, Debt / EBITDA of above 6.0x, EBITA / Interest expense of 1.0x or less and RCF / Net Debt below 10% on a sustained basis could trigger a downgrade. Furthermore, failure to achieve positive free cash flow by the end of 2011 could also put downward pressure on the current rating.

For more information on Marfrig, refer to Moody's credit opinion on moodys.com.

Moody's last rating action on Marfrig was on 16 June 2010, when Moody's placed Marfrig's B1 foreign currency rating under review for possible downgrade.

The principal methodology used in rating Marfrig was that for Moody's Global Food — Protein and Agriculture Industry (published in September 2009) and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Marfrig, headquartered in São Paulo, Brazil, is one of the leading food groups globally with beef, poultry, pork and lamb processing plants in 22 countries, including Brazil, Argentina, Uruguay, Chile, England, Northern Ireland, France, The Netherlands and USA. Marfrig processes, packages and delivers fresh, chilled and processed beef, chicken, pork and lamb products to customers in Brazil and abroad, with approximately 45% of its global sales derived from exports. Along with its beef products, the company also operates a wholesale food distribution business which delivers additional food products that it imports or acquires in the local market. Marfrig reported net consolidated revenues of BRL 11.7 billion over the last twelve months ended 30 June 2010 (USD 6.6 billion converted by the average exchange rate).

Keystone Foods, LLC, founded in 1973, is headquartered in West Conshohocken, Pennsylvania, United States and is a worldwide supplier and distributor of protein products including beef, chicken and fish. It is a premier supplier for quick service restaurants (QSR) such as McDonald´s, Subway and Chipotle. Globally, the company serves more than 28,000 restaurants and has 27 distribution centers in 11 countries across the USA, Europe, Asia and the Middle East. The company also operates 13 protein plants in seven countries globally. Approximately 60% and 40% of revenues come from distribution and protein respectively while Europe and USA account for 40% of the company's total sales each.

Sao Paulo
Ricardo Kovacs
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
55-11-3043-7300

New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
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MOODY'S CONFIRMS B1 RATING OF MARFRIG; OUTLOOK STABLE
No Related Data.
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