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Rating Action:

Moody's assigns a B3 corporate family rating to Virgolino and to its proposed notes. Outlook is stable.

 The document has been translated in other languages

12 Jan 2011

Approximately USD 250 million in debt securities affected

Sao Paulo, January 12, 2011 -- Moody's Investors Service has assigned first-time B3 corporate family rating to Agropecuária Nossa Senhora do Carmo S.A. ("Virgolino") and B3 to its proposed USD 250 million 7-year senior unsecured notes issued by its Cayman Island based offshore subsidiary, Virgolino de Oliveira Finance Limited, with an unconditional guarantee from Agropecuária Nossa Senhora do Carmo S.A., and its subsidiaries Virgolino de Oliveira S.A. Açúcar e Álcool, (" Virgolino de Oliveira"), Açucareira Virgolino de Oliveira S.A. ("Açucareira Virgolino"), and Agropecuária Terras Novas S.A. ("Agropecuária Terras Novas"). The outlook for both ratings is stable. The B3 rating reflects Virgolino's enhanced operating performance boosted by the partnership with Copersucar, as well as the lengthened debt profile after the proposed issuance that would be more in line with company's operating cash generation. This is the first time Moody's has rated Virgolino.

RATINGS RATIONALE

"Despite the volatile nature of the sugar and ethanol industry and the susceptibility of its earnings to currency fluctuations, the profitability and cash flow of Virgolino's operations improved in the fiscal year end 2009/2010 (April/2010) as a result of significant operating efficiencies after the startup of two newest sugar and ethanol plants José Bonifácio, initiated in 2006 and Monções in 2008, still high international sugar prices and the absence of non-recurring events, including the cost of a new energy generator in the previous year", says Ricardo Kovacs, a Moody's Vice President and lead analyst for Virgolino.

The positive trend with respect to sugar prices was evidenced in Virgolino's 2Q11 increased revenues. The company also benefited from the flexible product mix between sugar and ethanol segments that allows management to shift mix of its 12 million tons of crushing capacity between 40% and 60% depending on the prevailing market conditions. Moody's expect Virgolino's sugar and ethanol businesses to deliver more stable earnings once all four production units anticipate elevated capacity utilization given expectations that demand for sugar and ethanol would remain higher than supply over the next 12 months, with lower global inventory levels and international prices trending above historical averages.

"The completion of the USD 250 million issuance is key to align Virgolino's debt maturity schedule to current cash flow generation level", says Ricardo, adding that "Moody's expects further efforts from the management to deleverage its balance sheet over the next 18 months and on cost reduction efforts in order to better manage the segment's volatility without damaging future cash inflows".

The company currently has only four operating mills: (Itapira with 1.7 million tons of crushing capacity; Catanduva -- 4.2 million tons; José Bonifácio -- 3.7 million tons and Monções -- 2.4 million tons). The concentration of operations in these four plants increases exposure to event risks like accidents and labor strikes, which could cause business interruptions and impact cash flow unexpectedly.

With 12 million tons of crushing capacity and approximately USD 600 million of net revenues, Virgolino is significantly smaller in terms of net revenues than its international rated peers Suedzucker (Baa2, USD 8.1 bln), Tate&Lyle (Baa3, USD 5.5 bln) and Tereos (Ba3, USD 4.3 billion), as well as its Brazilian peer Cosan (rated Ba2, USD 8.8 bln), which has crushing capacity of 62 million tons through 23 sugar-cane mills.

Virgolino's smaller size, however, is partially mitigated by its ability to report higher operating margins than most of its peers. Its EBITDA margin of 28.4% in FY 4/10(according to Moody's standard adjustments) is somewhat higher than its international peers' and compares favorably against its Brazilian peer, Cosan. The company benefits from the significant cost advantages of operating in one of the highest yielding sugar cane regions of the world. Virgolino further benefits from its Copersucar exclusivity partnership agreement which assures full acquisition of production and more stable cash flow while allowing relatively lower transportation costs. Virgolino's tight control over cost of production, and the fact that 50% of its sugarcane is from its own or leased land from its shareholders and third parties, and the remaining 50% coming from third-parties with no concentration are also credit positives.

A Corporate Family Rating is an opinion on the expected loss associated with the debt obligations of a group of companies assuming that it had one single class of debt and is a single consolidated legal entity. Specific debt instruments for the same corporate family may be rated differently, depending on their seniority and guarantors, as compared to other debt instruments issued by the group.

The B3 rating assigned to the senior unsecured notes is at the same level of Virgolino's corporate family rating given the limited amount of secured debt in the capital structure. The company plans to use the proceeds to prepay short term secured indebtedness as described in the offering memorandum. Moody's has reviewed preliminary draft legal documentation for the transaction. The rating assumes there will be no material variation from the drafts reviewed and that all legal agreements are legally valid, binding and enforceable.

The stable outlook reflects Moody's expectation that Virgolino's management will remain focused on improving its debt maturity profile, reduce leverage and improve cash flow metrics. In addition, Moody's expects earnings to grow double digits in the 2011 fiscal year due to the recent historical pickup in sugar prices, keeping in mind the inherent volatility of commodity prices, and that excess cash generation will be used to pay-down maturing debt. Moody's expect Virgolino to remain free cash flow positive and maintain conservative financial policies.

Positive pressure could develop if debt to EBITDA fell below 4.0x, RCF to net debt was above 20% and EBITA to interest expense went above 1.5x, on a sustained basis.

Negative pressure could develop on the rating if FCF went negative, EBITA to interest expense fell below 1.0x and EBITDA margin was reduced to below 20% on a sustainable basis. Although unlikely in our view, if Virgolino were to leave Copersucar (Cooperative of Sugarcane, Sugar and Alcohol Producers of the State of São Paulo) for any reason, it would also pressure the rating.

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

Founded in the 1930's and based in São Paulo state, Brazil, Virgolino is a family owned business still headed by the founding Oliveira family. It operates in the sugar and ethanol production through 4 production plants, all located in Sao Paulo state, and posted BRL 1.0 billion revenues (approximately USD 600 million) for the fiscal year ending April 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, 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 assigning 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.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Moody's assigns a B3 corporate family rating to Virgolino and to its proposed notes. Outlook is stable.
No Related Data.
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