September 3, 2008

Fitch Assigns ‘B+’ Rating to Brazil’s Marfrig

Fitch Ratings assigns Marfrig Frigorificos e Comercio de Alimentos LTDA (Marfrig, or the company) Foreign and Local Currency Issuer Default Ratings (IDR) of 'B+'. Fitch has also assigned a 'B+/RR4' rating to the US$375 million senior unsecured bonds due 2016 issued by Marfrig Overseas Limited (a special-purpose vehicle wholly owned by Marfrig in the Cayman Islands), unconditionally guaranteed by Marfrig. Additionally, Fitch assigned Marfrig a National Scale rating at 'BBB+(bra)'. The Rating Outlook is Stable.

The ratings of Marfrig are supported by the company's business position as one of Brazil's largest producers of beef and beef by-products, the country's third-largest exporter of fresh and chilled beef, and a growing share of its future revenues coming from the sale of poultry meat through the acquisition of OSI Group. The ratings also reflect Marfrig's low cost structure in line with other Brazilian beef producers, and a more diversified business profile than many of its peers including assets overseas and a wider range of products. The company's activities are evenly distributed between the domestic market and export sales. The ratings incorporate Marfrig's above-average geographical diversification, both domestically with plants in six Brazilian States, and internationally, with plants in Uruguay, Argentina, Chile, and Europe. Diversification of sales by country is important in order to mitigate risks related to the government's imposition of sanitary restrictions.

The ratings reflect Marfrig's aggressive growth strategy based on acquisitions, which have totaled 17 since the beginning of 2007. Revenues have almost doubled during the last 12 months ended June 30, 2008, versus full-year 2006. Growth has been financed by increased debt and a 2007 IPO, at which time the company raised BRL600 million. Its growth strategy has led to increasing working capital requirements and resulted in negative free cash flow generation in the past few years. Fitch would expect free cash flow generation to improve as the company finalizes the consolidation of all its acquisitions, including its latest acquisition of OSI Group's businesses in Brazil and in several European countries for US$680 million announced in June 2008 and fully financed with equity. Fitch does not expect any major acquisitions in the near term because of the company's need to concentrate its efforts on consolidating existing purchases and its lack of financial flexibility.

The ratings also reflect Marfrig's exposure to the volatility of raw material costs and of domestic and international beef prices, supply and demand imbalances in the protein market due to factors such as disease and adverse weather conditions, unfavorable global economic conditions, changes in beef consumption habits, government-imposed sanitary and trade restrictions, and competitive pressures from other Brazilian or international beef producers and exporters.

Marfrig's capital structure is highly leveraged with BRL2.5 billion total debt on its balance sheet at the end of June 30, 2008. At the end of the same period, total-debt-to-EBITDA was 5.3 times (x) and net-debt-to-EBITDA was 3.7x. Debt maturities are staggered and consist of 20% in 2008 (mostly trade-related credit lines, which are supported by its significant level of exports and in line with the industry), 3.4% in 2009, 9.2% in 2010, 16.8% in 2011, 12% in 2012, and the rest after that, with over 25% maturing in 2016. Fitch expects much improved credit metrics in the near future as the company begins to consolidate the results from the OSI acquisition, which should add at least BRL120 million of annual EBITDA and was fully financed with equity.

The Marfrig Group is one of Brazil's largest producers of beef and beef by-products and the country's third-largest exporter of fresh and chilled beef. The company is one of the more geographically diversified beef companies, with slaughtering operations in Brazil, Uruguay, Argentina, and Chile. Additionally, the company produces lamb and pork and distributes other food products (pre-cooked frozen potatoes, vegetables, ready-to-eat meals, and pastas) through its distribution channels. The company is also in the process of acquiring OSI Group's businesses in Brazil and in several European countries, including 15 manufacturing facilities for further processed and industrialized products and poultry slaughtering.

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