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Rating Action:

MOODY'S UPGRADES COSAN'S RATINGS TO Ba2 AND RATES NEW PERPETUAL NOTES Ba2

25 Oct 2010

Approximately $ 1,150 million of debt securities affected including the new issuance

Sao Paulo, October 25, 2010 -- Moody's Investors Service upgraded Cosan S.A. Industria e Comercio S.A.'s ("Cosan", the company) corporate family rating (CFR) to Ba2 from Ba3. Also impacted by our rating action are Cosan Finance Limited's $400 million 7% senior unsecured notes due 2017 and Cosan S.A.'s $450 million senior unsecured perpetual notes which were both similarly upgraded to Ba2 from Ba3. This action completes the review process for a potential upgrade which we commenced on March 1, 2010 after Cosan and Shell International Petroleum Company Limited ("Shell") announced their intention to create a $12 billion joint venture (the "Joint Venture") to produce and commercialize ethanol and power from sugar cane and distribute a variety of industrial and transportation fuels through a combined distribution and retail network in Brazil.

At the same time Moody's assigned a Ba2 rating to Cosan Overseas Limited's proposed $300 million senior unsecured perpetual notes issuance, which initially will be unconditionally guaranteed by Cosan and by CCL upon the completion of the proposed joint venture with Shell . The outlook for the CFR and the proposed note offering is stable.

However, we are assigning a positive outlook on the company's existing 2017 senior unsecured and existing perpetual notes (both securities will be contributed to the Joint Venture) .

RATINGS RATIONALE

The upgrade, which is predicated on our view that the Joint Venture will be consummated on basically the terms and within the time frame that has been communicated by the company, reflects the anticipated improvement in the credit and business profile of Cosan upon closing of the transaction. In our analysis we have considered the anticipated strong credit profile of the Joint Venture albeit offset in part by the lack of full ownership and control of the Joint Venture by Cosan. Specifically, the Joint Venture is expected to enhance Cosan's credit profile in three ways. First, based on the expected dividend stream from the Joint Venture, we believe that Cosan's cash flow will demonstrate less volatility given the more stable characteristics of the fuel distribution business to be contributed by Shell. Second, Cosan will gain access to what will now be Brazil's third largest fuel distributor for its ethanol and the JV will provide Cosan with a better capitalized vehicle to take advantage of the attractive yet capital intense sugar ethanol prospects in the Brazilian market. Third, Cosan will transfer significant amount of its debt to the JV and likely enjoy lower leverage post restructuring.

In our analysis we have also taken into consideration the challenges in running a business where both parties have equal decision making power, the current lack of clarity with regard to the Joint Venture's expected synergies, financial performance objectives, policies and strategic initiatives, the rebranding of Cosan's existing fuel distribution network, and execution risk.

As part of the joint venture agreement, Cosan and Shell will create three new legal entities and both parties will contribute certain assets and liabilities.

A management company, in which both parties will have an equal 50% economic and voting interest, will be the principal vehicle through which the partners will run the contemplated venture. Day-to-day operations will be conducted out of two newly to be formed operational joint ventures. A Sugar and Ethanol Company (the "S&E JV"), in which both parties have an equal economic interest but which will de facto be controlled by Cosan (who will have 51% of the voting shares), will run the production of sugar and ethanol as well as the co-generation activities. A Downstream Company (the "Downstream JV"), in which both parties also hold equal economic interests but which will be controlled by Shell (having 51% of the voting shares), will conduct the supply, distribution and sale of the Joint Venture's fuel business.

Cosan will contribute to the Joint Venture principally all of its sugar and ethanol mills and ethanol logistics assets, all of its energy co-generation business and fuel distribution and retail businesses. Additionally, Cosan will contribute an estimated USD 2.5 billion plus BRL 500 million of existing debt and general working capital liabilities. Shell will contribute its Brazilian fuel distribution and retail as well as its jet fuel businesses, its equity stake in two next generation biomass fuel research ventures as well make an estimated $1.6 billion in cash payments over a two year time period.

It is contemplated that the cash management for the two operating joint ventures will be run on a consolidated basis and all contributed debt plus that the debt to be issued will benefit from cross guarantees between the two joint ventures. While Moody's does not rate the Joint Venture, we believe that based on the available information today the credit quality is likely to be higher than that of Cosan on a standalone basis following completion of the Joint Venture.

Under the terms of the joint venture, Shell will have the option at the 10th anniversary to buy 50% or all of Cosan's stake in the proposed Joint Venture. In addition, at the 15th anniversary, Shell will have another option to acquire all or the remaining interest of Cosan in the Joint Venture. If Shell does not exercise the option, Cosan will have the option to acquire Shell's stake in the Joint Venture.

While the change of control provision in the proposed note indenture provides reasonable protection to bondholders if Shell were to exercise in full its call option to acquire Cosan's interest in the Joint Venture at its 10th or 15th anniversary, this is not the case if Shell were to acquire only half of Cosan's 50% stake in the venture at the 10th anniversary . Under the terms of the indenture, a change of control which results in a ratings decline will give bondholders the right to put the bonds back to the issuer or guarantors at 101% plus accrued interest. The change of control provision is triggered only if Cosan sells all or substantially all of its assets (which would include its interest in the Joint Venture) and if Cosan does not use the proceeds from such a sale to make permitted reinvestments within 360 days of receipt. Permitted reinvestments are defined to include the permanent repayment of debt (except for subordinated debt) or certain investments in permitted businesses and productive assets (as defined in the indenture).

The Joint Venture, which is still subject to regulatory approvals in Europe and Brazil is scheduled to close on March 31, 2011, which will coincide with the end of the fiscal year of Cosan.

Upon completion of the joint venture, earnings of the Cosan will be derived principally from the dividends it will receive from its equity stake in the S&E and Downstream JVs. Additional contributions will come from dividends from its 69.7% stake in Rumo Logistica, its 18.9% stake in Radar as well as all of the earnings from its remaining lubes business ("CCL Lubricants").

Cosan's guarantee will also benefit from certain land holdings which will stay with the Company following the completion of the Joint Venture.

The stable outlook on the company's CFR and the proposed note offering reflects our expectation that the ratings will not likely experience upwards pressure over the near term as it will receive the benefits from the Joint Venture only in an indirect manner through the payment of future dividends. Additionally, Cosan will have to share all decision making on an equal basis with Shell limiting its control over the Joint Venture's strategy and financial policies.

The positive outlook on Cosan's existing debt securities which are expected to be contributed to and assumed by the Joint Venture reflects our view that the Joint Venture is likely to have better credit fundamentals. As such these existing securities are likely to experience upwards ratings pressure over time.

Ratings on the existing notes could experience upwards pressure if the Joint Venture adopts financial policies which would be commensurate with an investment grade profile while simultaneously providing consistent dividend payments meaningfully above the minimum 25% pay-out ratio as currently contemplated, the expectation of a sustainable improvement in financial leverage and more stable cash flows.

Ratings could experience downward pressure if the Joint Venture adopts financial policies which are not commensurate with an investment grade credit profile, earnings and cash flows do not demonstrate the expected reduction in volatility, and Cosan adopts more aggressive financial and or strategic policies then currently contemplated.

The principal methodology used in rating Cosan S.A. Industria e Comercio was Global Food - Protein and Agriculture Industry rating methodology published in September 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

COMPANY PROFILE

Headquartered in Piracicaba, Brazil, Cosan S.A. Industria e Comercio) is a low-cost Brazilian sugar / ethanol producer. It is the largest sugar producer in Brazil and the third largest sugar producer in the world, having sold 4.1 million tons of sugar in fiscal year 2010. It is also the largest exporter of sugar in the world.

Regarding its ethanol business, Cosan is the largest ethanol producer in Brazil and the second largest in the world, having sold 2.1 billion liters in fiscal year 2010, and the largest exporter of ethanol in the world. Notably, the group is the largest grower and processor of sugarcane in the world (twice the size of the second player), with a crushing capacity expanded of approximately 62 million tons as of June 30, 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning/maintaining a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Sao Paulo
Filippe Goossens
Senior Vice President
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 UPGRADES COSAN'S RATINGS TO Ba2 AND RATES NEW PERPETUAL NOTES Ba2
No Related Data.
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