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Rating Action:

Moody's assigns a B3 rating to Independência's proposed notes

10 Jan 2007
Moody's assigns a B3 rating to Independência's proposed notes

Sao Paulo, January 10, 2007 -- Moody's Investors Service ("Moody's") assigned a B3 global local currency scale corporate family rating to Independência Alimentos Ltda. ("Independência") and also a (P)B3 foreign currency rating to its proposed USD 150 million senior unsecured notes issued by Independência International Ltd. but unconditionally guaranteed by Independência, subject to closing.

"The B3 global local currency rating reflects primarily Independência's relative small size, scale and limited geographic diversification of its raw materials, along with the risks posed by animal disease issues, high leverage and family-owned status and financial disclosure affecting its corporate governance standards," says Moody's analyst Soummo Mukherjee. "More positively, the B3 rating also reflects the company's competitive cost-structure leading to its high margins compared to its global peers, the diversification of its sales into wet blue leather and pork besides its core fresh-meat beef business, and the overall positive fundamentals for the Brazilian fresh beef and leather industries," he adds.

This is the first time Moody's has rated Independência. The rating outlook is stable.

Moody's assigned the following ratings:

- Guaranteed USD 150 million in senior unsecured notes: (P)B3

- Global local currency scale corporate family rating: B3

Approximately USD 100 million of the net proceeds of the proposed notes will be used to repay a portion of existing short-term debt, while the remaining USD 50 million will be used for capital expenditures and general corporate purposes. 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.

Moody's considers Independência's B3 global local currency corporate family rating in the context of the key rating drivers cited in Moody's Rating Methodology for Global Natural Product Processors. Among such factors, the B3 reflects Independência's relative small size in terms of revenues and its position as the fifth largest beef processor in Brazil behind Friboi (rated B1), Bertin (rated Ba3), Marfrig (rated B1) and Minerva (NR). Additionally, the B3 rating reflects the sector's exposure to animal disease and food safety issues, which could lead currently importing countries to indefinitely suspend or restrict imports of fresh beef or pork from certain Brazilian states or the entire country. Over 50% of Independência's sales are derived from fresh meat exports. Moody's also views Independência as susceptible to an outbreak of foot-and-mouth disease (FMD) although we recognize the company's efforts to mitigate this risk by diversifying its production facilities into additional states in Brazil. Independência's nine production facilities are currently five Brazilian states: Mato Grosso do Sul, Minas Gerais, São Paulo, Rondônia and Tocantins.

"Independência, however, benefits from the positive fundamentals of the Brazilian beef industry, which include, among other factors, the fact that Brazil has the largest commercial cattle herd and that the cattle in Brazil is grass-fed, virtually eliminating the risk of BSE (mad-cow disease) and producing the low fat and chemical-free beef quality that most of its importing countries prefer," says Mukherjee. "Additionally Brazilian beef producers also enjoy one of the most competitive cost structures in the world, largely driven by Brazil's lower costs for land and labor, compared to other major global producers," he adds.

Moody's views Independência's privately-held and family-owned status as a factor in the company's corporate governance practices. As a privately-held limited company, Independência is not subject to most of the corporate governance and financial reporting practices of a publicly-traded company. Moreover, the company's financial statements are audited by a small Brazilian auditing firm that is not well-recognized internationally. However, Independência has changed its audit firm to a larger, more well-recognized one, which Moody's regards as a positive step.

The B3 foreign-currency rating assigned to the guaranteed senior unsecured notes is at the same level as the global local currency corporate family rating because of Independência's low level of secured debt (less than 15% of total debt), which will be further reduced after the proposed new issue.

The stable outlook is based on the expectation that the current embargo due to FMD by many key importing countries on Brazilian beef will not materially impact Independência's operations going forward. Additionally, the stable outlook assumes that Independência will deliver on its strategic initiatives to expand slaughter capacity and grow export sales, leading to growth in revenues and cash flow, which will be used to reduce debt.

Independência's rating could be under downward pressure if earnings and cash flow are negatively impacted or its liquidity becomes constrained due to the loss of key export markets or a prolonged downturn in the Brazilian beef processing industry. The ratings could also be downgraded if the company's debt level increases so that Debt / EBITDA (according to Moody's standard adjustments) is higher than 6.0 times.

Similarly, upward pressure on Independência's current B3 rating would occur if it delivers on its strategic plans to grow revenues and earnings, improves its financial reporting standards, and is able to reduce its current leverage so that Debt / EBITDA (according to Moody's standard adjustments) falls below 5.0 times on a sustainable basis.

Headquartered in Cajamar, São Paulo, Brazil, Independência is Brazil's fourth largest producer of fresh and frozen beef and wet blue leather with eight beef slaughtering facilities, one pork slaughtering facility, a jerked beef plant and three storage facilities located in the following five Brazilian States: Mato Grosso do Sul, Minas Gerais, São Paulo, Rondônia and Tocantins.

Sao Paulo
Soummo Mukherjee
Asst Vice President - Analyst
Corporate Finance Group
Moody's America Latina Ltda.
55-11-3043-7300

New York
Peter H. Abdill, CFA
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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