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Rating Action:

Moody's assigns a (P) Caa1 rating to Independência's proposed notes

12 Mar 2010

Approximately USD 150 million of rated debt affected

Sao Paulo, March 12, 2010 -- Moody's Investors Service ("Moody's") assigned a provisional (P) Caa3 local currency Corporate Family Rating ("CFR") to Independência Alimentos S.A ("Independência") and also a (P) Caa1 foreign currency rating to its proposed guaranteed USD 150 million senior secured notes maturing in 2015. The rating outlook is stable.

The proposed USD 150 million senior secured notes will be issued by Independência International Ltd., a wholly owned subsidiary of Independência, and these bonds will be unconditionally and irrevocably guaranteed by Independência. Proceeds from the proposed issuance will be used to fund working capital and general corporate purposes, payment to suppliers and transaction fees and expenses. The notes will be secured by a first priority lien on substantially all assets of the issuer and the note guarantors, including chattel mortgage ("alienação fiduciária") on all of the company's current property, plant and real estate. The ratings are assigned on a provisional basis pending the successful exit from bankruptcy and completion of the planned note offering.

"Independencia's Caa3 CFR rating is largely based on the company's perceived challenges to operate post bankruptcy at a very high starting leverage, as measured by Total Debt to EBITDA, of over 28 times by the end of 2010. In order for the company to delever, it will rely on Independência's ability to increase production capacity, as per its business plan, by reopening plants that are currently idle to grow revenues and EBITDA. Additionally, the Caa3 CFR rating for Independência factors in the company's very tight headroom under its financial maintenance covenants. Finally, the Caa3 CFR rating also incorporates the company's smaller size and less diversified product portfolio relative to peers with a concentration on fresh beef sales, which tend to be a more commoditized product and susceptible to animal disease and food safety issues that may disrupt its export sales" explained Moody's VP Senior Analyst, Soummo Mukherjee.

"On the other hand, these negative factors are partially mitigated by 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. 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. Independência also benefits from its proprietary refrigerated storage space at the Port of Santos, one of Brazil's principal ports through which approximately 70% of Brazilian beef exports are exported, its logistics infrastructure that provides the company with the ability to preserve the quality and increase the shelf-life of its products. The company is restructuring many of its internal administrative and production controls intended to help the company achieve its projected results.

The proposed USD 150 million guaranteed senior secured notes were rated (P) Caa1, or two notches above the company's (P) Caa3 CFR, due to the expected high recovery of this debt instrument arising from its first priority lien on substantially all assets of the issuer and the note guarantors, including chattel mortgage on all current property, plant and real estate to the creditors. Creditors secured by chattel mortgage have full priority and are payable with preference over existing pre-petition claims and even post-petition, super-priority claims, including ACC claims. That is because the assets transferred to the relevant creditor under a chattel mortgage are not considered property of the estate. Therefore these assets will not be subject to subsequent liquidation and payment of the existing claims, pursuant to a ranking of priorities. As of December 31, 2009, and pro-forma for the new transaction, 100% of Independência's outstanding debt would be junior to the proposed issuance in the priority of claims. The proceeds will be used in helping the company exit from bankruptcy with the payment to suppliers, and to fund working capital and general corporate purposes for the reopening of idle plants.

The judicial recovery plan in summary established the change in the organizational structure merging the companies of the Independência group, altering the corporate governance structure so that the controlling partners no longer hold executive positions. Furthermore, Independência's former CFO, Tobias Bremmer, was promoted to CEO, while several board committees were set-up generally improving Independência's corporate governance standards. The judicial plan also granted special terms and conditions for debt repayments including the haircut of 50% on all unsecured debt, termination of some lease/FINAME agreements without penalties, renegotiated payment dates and terms of secured debt. The plan, however, is dependent on receiving the exit financing and/or capital increase.

Independência is currently slaughtering around 1,200 heads of cattle per day. The new bond issuance is aimed at allowing the company to jump-start several plants so that the company can gradually increase production to slaughter 3,475 heads per day by the end of 2010 and 6,500 heads/day by the end of 2012. Deboning capacity is also aimed to increase to 493 tons per day at the end of 2010 and 1,290 tons per day by the end of 2012. Finally, leather production capacity should increase to 6,000 hides per day in 2010 and dried beef production capacity of 50 tons per day in 2010.

Independência's commercial strategy targets the specific demands of the domestic and export beef and leather markets. This is only possible due to its relatively smaller size compared to larger domestic players. Therefore, it tries to customize products to specific market demands in order to add value and increase the average sales price of its products. One of its most successful strategies is the production of customized, "private label" products, which they produce and package and its customers sell to the final consumers with their own brand name. Independência also offers products to meet the needs of certain niche markets, such as kosher, halal and organic beef. In the domestic market they target regional retail sales that have better margins.

The stable outlook is based on our expectation that Independência will secure the USD 150 million exit finance notes and gradually reopen its idle plants and deleverage with the increased EBITDA generation.

Upward pressure on Independência's Caa3 rating would require a track record of successful execution of the reorganization plan, and steadily improving debt protection metrics while maintaining adequate liquidity and compliance with its bond maintenance covenants. Quantitatively, upward pressure is likely to arise if Total Debt / EBITDA falls towards 9.0x before the end of 2011 and CFO moves towards positive territory.

Downward pressure on Independência's rating or outlook is likely to result due to a failure or significant delays to reopen its idle plants as per the company's business plan, adverse market conditions, or increased competition, that negatively impact Independência's ability to improve EBITDA and meet the financial covenants established in the new bond indenture. Similarly, a deterioration in the company's liquidity situation would put downward pressure on Independência's current rating.

Moody's assigned the following ratings:

- Global local currency scale corporate family rating: (P) Caa3

- Guaranteed USD 150 million in senior secured notes due in 2015: (P) Caa1

Moody's last rating action on Independência was on March 2nd, 2009, when we lowered its ratings to Ca, which were subsequently withdrawn following the announcement that the company had filed for bankruptcy.

The principal methodology used in rating Independência was that for Moody's Global Food — Protein and Agriculture Industry (published in September 2009) and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Independência is 78.2% owned by the Russo family, with the remaining 21.8% owned by BNDESPAR.

Headquartered in Cajamar, São Paulo, Brazil, Independência currently only has 2 of its 11 slaughtering plants operating. The company also has deboning and leather facilities. Additionally, Independência has capacity to produce 1,700 tons of dry meat (beef jerky) per month and to warehouse 8,775 tons of beef.

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

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

Moody's assigns a (P) Caa1 rating to Independência's proposed notes
No Related Data.
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