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Rating Action:

Moody's assigns B1 rating to Marfrig's USD 500 million proposed notes, stable outlook

 The document has been translated in other languages

26 Apr 2011

Approximately USD 500 million in rated debt affected

Sao Paulo, April 26, 2011 -- Moody's has assigned a B1 foreign currency rating to the proposed USD 500 million of senior unsecured guaranteed notes to be issued by Marfrig Holdings (Europe) B.V., a wholly owned subsidiary of Marfrig Alimentos S.A. ("Marfrig"). The notes will be unconditionally and irrevocably guaranteed by Marfrig and certain subsidiaries of the guarantor. At the same time, Marfrig's existing B1 senior unsecured and corporate family ratings are affirmed. The proceeds of this issuance will be mainly used to refinance short term maturing debt. The outlook for the ratings is stable.

The following rating was assigned:

USD 500 million senior unsecured guaranteed notes due 2018: B1 (foreign currency)

The following ratings were affirmed:

- Corporate family rating: B1 (Global scale)

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

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

The outlook for all ratings is stable.

Marfrig's B1 rating reflects the company's more diversified portfolio of products and by-products in animal proteins (beef, poultry, pork, lamb and turkey), its growing portfolio of branded value-added products, its broader geographic footprint and competitive cost-structure. However, the rating also incorporates Marfrig's continuous weak cash flow from operations, relatively high leverage, and the remaining challenges in successfully integrating the Seara acquisition of 2009, but more critically the USD 1.26 billion Keystone acquisition in mid-2010, as well as two strategic Chinese joint ventures that will require ongoing investments.

The proposed USD 500 million notes issuance is part of Marfrig's liability management as most of the funds will be used to pay short term maturing debt and the 2018 maturity of the proposed notes falls between the maturities of two similar bonds. The B1 rating of the proposed notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and that these agreements are legally valid, binding and enforceable.

In 2010, Marfrig's net revenues increased 65% from a year before, however, the raise was mostly due to the Seara and Keystone acquisitions rather than organic growth. More importantly, Marfrig's gross margin and EBITDA margin increased to 16.5% and 11.2% in 2010 from 13.1% and 8.7%, respectively, in 2009. The evolution in margins was led by higher prices and higher protein demands, both domestically and from the export markets, and were achieved despite a 6% appreciation of the BRL against the USD. The slightly better EBITDA margins also improved Marfrig's leverage. We expect Marfrig's leverage (Total Debt to EBITDA) to fall back to around 4.5x thanks to the cash flow from Seara and the benefits of acquisition synergies. Moody's also expects Marfrig's free cash flow generation to improve based on the gradual recovery of export markets conditions and by the continued development of the domestic Brazilian market where per-capita consumption should trend upward, but perhaps at a more controlled pace due to inflationary reservations.

In 2010, the company's liquidity slightly improved due to effective control of working capital demands and the issuance of BRL 2.5 billion (approximately USD 1.3 billion) in new mandatory convertible debentures, but since the convertibles were mostly used for the Keystone down-payment, Marfrig's cash position returned to around BRL 3.9 billion (approximately USD 2.3 billion) versus the company's BRL 3.2 billion (approximately USD 1.8 billion) in short term debt maturing in 2011. The proposed USD 500 million issuance will further lengthen Marfrig's average debt maturity as at least 75% will be used for short-term debt repayment.

Moody's regards as positive the fact that BNDES, through its equity arm, BNDES Participações S.A. ("BNDESpar", rated A3 local currency rating), is a strategic shareholder in Marfrig. BNDESpar has a track record for sustaining its equity investments and is a source of cheap financing for local currency debt in Brazil.

The stable outlook is based on our expectation that Marfrig will remain focused in 2011 on completing the integration of its large acquisitions and investments in China, while maintaining adequate liquidity and financial metrics for its rating category. We expect the company will prudently manage its liquidity, maintaining a minimum cash position of BRL 2.6 billion, and capital structure.

Marfrig's rating would likely come under downward pressure if the company faces greater than expected integration or operating challenges abroad that leads Marfrig's EBITDA margins to drop significantly below 10% for two consecutive quarters (margin was 11.2% in 2010). Negative pressure is also likely if Marfrig's liquidity were to deteriorate. Quantitatively, downward pressure on Marfrig's B1 rating or outlook is likely if Total Debt / EBITDA is sustained above 6.0x (5.7x in 2010), EBITA to gross interest expense falls below 1.0x (1.0x in 2010) or if Retained Cash Flow to Net Debt is below 10% (19.5% in 2010). All credit metrics are according to Moody's standard adjustments and definitions.

The ratings or outlook could present upgrade pressure if Marfrig is able to improve its liquidity profile and better manage its working capital needs to strongly enhance its cash flow from operations on a sustained basis. An upgrade would also require evidence that the company's integration with Seara and Keystone, as well as its latest investments in China, are on track and free cash flow will be positive on a sustained basis. Quantitatively, an upgrade would require CFO/ Net Debt approaching 20% (1.2% in 2010) and Total Debt / EBITDA of near 4.0x (5.7x in 2010). Finally, Marfrig's ability to consistently maintain EBITDA margins above 5% during a down cycle in the global industry would be also positive for the ratings.

The principal methodology used in rating Marfrig was that for Moody's Global Food — Protein and Agriculture Industry (published in September 2009).

Marfrig, headquartered in São Paulo, Brazil, is one of the largest animal protein processing companies in Brazil. With 151 processing plants operating in 22 countries, including Brazil, Argentina, Uruguay, Chile, England, Northern Ireland, France, the Netherlands, and the USA. Marfrig processes, prepares packages and delivers fresh, chilled and processed beef, pork, chicken, lamb as well as leather products to customers in Brazil and abroad, with approximately 40% of its 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.

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 and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of 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
Ricardo Kovacs
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's America Latina Ltda.
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Moody's assigns B1 rating to Marfrig's USD 500 million proposed notes, stable outlook
No Related Data.
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