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Rating Action:

Moody's assigns (P)B2 rating to DOUX's EUR400 million senior unsecured notes

Global Credit Research - 09 Nov 2010

Paris, November 09, 2010 -- Moody's Investors Service has today assigned a provisional (P)B2, LGD4 (52%) long-term senior unsecured rating to the proposed EUR400 million worth of senior unsecured notes, maturing in 2017, to be issued by DOUX SA. Concurrently, Moody's has assigned a provisional (P)B2 corporate family rating (CFR) and (P)B2 probability-of-default-rating (PDR) to DOUX SA. The outlook on the ratings is stable.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the notes. A definitive rating may differ from a provisional rating.

The notes will be guaranteed by DOUX SA's principal subsidiaries. The proceeds from the proposed issuance will be used to refinance the company's existing indebtedness.

The (P)(B2) CFR is contingent upon the successful issuance of the proposed EUR400 million senior unsecured notes.

RATINGS RATIONALE

"Whilst the (P)B2 CFR incorporates DOUX's efforts in rationalising its production and cost structure, which helped cushion it against the negative effects of difficult trading conditions in 2009, it is constrained by: (i) structurally challenging, and recently more volatile, conditions within the industry, including its commodity-driven nature and exposure to food safety issues; (ii) DOUX's concentration on chicken protein; and (iii) the company's currently weak, albeit improving, credit metrics," says Yasmina Serghini-Douvin, a Moody's Assistant Vice President and lead analyst for DOUX.

"However, the rating also reflects: (i) the company's position as one of the world's leading poultry producers, with production operations chiefly in France and Brazil; (ii) its robust market positions in the competitive and fragmented French poultry market, as well as in the growing Brazilian and export markets (especially in the Middle East); and (iii) its portfolio of well-known brands of raw and processed products," adds Ms. Douvin.

DOUX has been exposed to many challenges over the past three years, which have put a strain on its profitability and cash flow generation. These include unusually high commodity prices (DOUX has historically purchased feed grains on the spot market), volatile foreign exchange rates, constrained consumer spending and pressures on export prices. The company's profitability has improved since 2009, as export prices somewhat recovered, commodity prices came down from their record highs and the company reaped the benefits from its ongoing restructuring programme. The current ratings factor in Moody's expectation of somewhat stabilised industry conditions in 2010, which, together with DOUX's ongoing cost-cutting initiatives, should result in the company achieving better operating margins and lower leverage. In this respect, the first months of 2010 were encouraging for the company, given that it exhibited improved profit trends, notably on the back of better export prices, and the ability to pass on some of the recent cereal price increases to its customers.

At the same time, Moody's cautions that DOUX has yet to confirm the positive trends seen in 2009 and the first months of 2010, and more evidence of sustained improvement in performance is required for the company's ratings to be more comfortably positioned in the category. Compared with its rated peers, DOUX is smaller in size and concentrated on a single protein, although it is comparatively more exposed to growing export markets in the Middle East and Eastern Europe, and displays somewhat weaker margins and debt protection ratios (calculated on a three-year-average basis). Moody's also note that the company's earnings have historically been impacted by fluctuations in currencies, given that its main functional currencies are the euro and Brazilian real, but that exports sales and debt incurred in Brazil are denominated in US dollars.

The proposed EUR400 million notes issuance is an essential part of the company's debt restructuring as the net proceeds will be used to refinance almost all of its existing bank debt of which (i) EUR123 million under its medium-term credit facility with Barclays at the level of DOUX SA; (ii) approximately EUR245 million of senior credit facilities and EUR11 million in short-term export credits at the level of DOUX Frangosul in Brazil.

The (P)B2, LGD4 (52%) long-term senior unsecured rating is in line with the (P)CFR, as DOUX's proposed senior unsecured notes will represent the single most important item in the company's liability structure. The notes will be jointly and severally guaranteed by the material subsidiaries of DOUX SA, which represented more than 95% of its consolidated EBITDA and revenue and more than 90% of its net assets in 2009.

However, Moody's expects the proposed notes to be contractually subordinated to approximately EUR32 million worth of secured bank facilities (on a pro forma basis at June 2010), consisting of EUR25 million under the French medium-term facility and a USD9 million term loan entered into by DOUX Frangosul.

The liquidity profile of DOUX will improve if and when the company successfully closes its proposed refinancing exercise, thus reducing its scheduled debt repayments in the coming years and lengthening its debt maturity profile, which is currently composed of a large proportion of short-term bank lines in Brazil. Moody's would then expect the company to finance its day-to-day business needs using principally cash flow generated from its operations, the factoring of receivables in France and Brazil and uncommitted short-term export lines. The business is subject to seasonality, with the second half of the year usually more favourable in terms of revenue and requiring fewer liquidity resources and borrowings than the first quarter.

Furthermore, in light of stabilising industry conditions, the absence of major projects requiring capital investments and the expectation of limited dividend payments to shareholders, Moody's expects DOUX to deliver modestly positive free cash flow (FCF) in the current financial year. The company's FCF generation will nevertheless be affected by the normalisation in trade payables that occurred in the first half of 2010, which resulted in a somewhat large working capital outflow.

The stable outlook is based on Moody's expectation that DOUX will continue in its efforts to improve its profitability and maintain positive FCF and comfortable liquidity with sufficient covenant headroom. It also factors in the rating agency's expectation that the company will achieve lower leverage during the course of 2010, evidenced by a debt-to-EBITDA (on a three-year average basis) ratio moving towards 5.0x.

The ratings or outlook could come under pressure if: (i) adverse market conditions depress DOUX's volumes or operating margin, or if the company fails to deliver an improved operational performance, resulting in negative FCF generation; (ii) if the company fails to reduce its financial leverage below 6.0x (on a three-year average) and to improve its retained cash flow (RCF)-to-net debt ratio towards 10%; or (iii) if any liquidity concerns develop notably if DOUX fails to maintain a comfortable covenant headroom in the next few quarters.

Upward pressure on the group's ratings or outlook would result from: (i) an improvement in (adjusted) EBITA margin above 5% on a sustainable basis; (ii) clear evidence of a sustainable reduction in financial leverage towards 4.0x (on a three-year average); and (iii) an RCF/net debt ratio above 10%.

The principal methodology used in this rating was Global Food - Protein and Agriculture Industry published in September 2009.

DOUX SA, headquartered in Chateaulin, France, is one of the world's largest poultry producers, with production facilities principally in France and Brazil. DOUX SA is a privately owned company that posted revenues of approximately EUR1.3 billion in 2009. The company produces, prepares, packages and delivers fresh, chilled and processed poultry and poultry processed products to customers in various countries in Europe, Brazil and the Middle East.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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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.

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Paris
Yasmina Serghini-Douvin
Asst Vice President - Analyst
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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Moody's assigns (P)B2 rating to DOUX's EUR400 million senior unsecured notes
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