Fitch Rates Minerva's Proposed US$150MM Sr. Notes 'B+'.

NEW YORK -- Fitch Ratings has assigned local currency and foreign currency Issuer Default Ratings of 'B+' to Industria e Comercio de Carnes Minerva Ltda. (Minerva) and a national scale rating of 'BBB(bra)'. Fitch has also assigned an issue rating of 'B+' as well as a recovery rating of 'RR4' to up to US$150 million of notes due 2017 to be issued by Minerva. Proceeds will be used to refinance existing short-term debt and for general corporate purposes. The Outlook for all ratings is Stable.

The ratings are supported by Minerva's business position as the third largest Brazilian exporter of fresh beef, its low cost structure, high grade of product customization and diversified and growing export revenue base. The ratings also reflect Minerva's highly leveraged capital structure and large future capital expenditure needs, which will pressure credit protection measures despite expected growth. The ratings consider that the proposed transaction will extend the debt maturity profile and mitigate refinancing risks, as 75% of the proceeds will repay short-term debt maturities. The ratings also reflect Minerva'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.

The company's activities are significantly export-oriented, with 80% of net revenues earned from foreign markets during 2005. The export revenue base is well diversified, with sales to approximately 80 countries. Minerva's favorable business position is underscored by Brazil's vast competitive advantages in cattle grazing and beef production. Brazil is the world's largest beef producer and in recent years has emerged as the world's largest beef exporter, increasing its share of world beef exports to 30% in 2005 from 5% in 1997. Cattle raising costs in Brazil are the lowest worldwide due to favorable geographic and weather conditions, availability and low cost of grazing land, and low cattle feeding costs. Others inputs such as energy and labor are also abundant and attractively priced. These advantages highlight the rapid growth over the past several years of Minerva's exports, which more than tripled to US$335 million in 2005 from US$93 million in 2002.

Product diversification is low, as sales are concentrated in one product, fresh meat, with low value added in the production chain. Exports of processed beef products account for less than 3% of revenues. The company, however, offers more than 4,000 different fresh meat cuts, a key feature of its strategy to provide customized service to clients' preferences. Minerva plans to grow exports of processed beef products with the construction of a new cooked frozen beef plant over the next two years.

Industry fundamentals are strong. Beef consumption is expected to continue to grow robustly driven by population growth and higher income per capita in East and Southeast Asia, Latin America, and the Middle East. Brazil should continue to lead the world's expansion of beef production and beef exports. The country possesses the world's largest commercial herd and one of the lowest slaughter rates, which means that it has vast potential to expand beef production by using more intensive methods.

Over the past several years, the company's revenues have grown robustly driven primarily by higher exports, despite a strong appreciation in the value of the Brazilian currency during the same time period. During the first nine months of 2006, revenues grew by 14% and the EBITDA margin improved to 10.6% from 8% during the prior comparable period as a result of higher export volumes, higher international prices, cost controls and efficiency gains from new modern plant facilities, including the incorporation of the newly built Palmeiras plant during 2005. EBITDA is expected to double in 2006 to approximately US$50 million from US$23 million in 2005. Notwithstanding, the company has reported negative free cash flows over the past several years due to growing working capital requirements, tax payments on exports and capital expenditures. These cash flow needs have been funded with short-term debt, pressuring leverage indicators. At Dec. 31, 2006, the company is expected to have approximately US$220 million of debt, a ratio of total debt to EBITDA of approximately 4.4 times (x) and a ratio of net debt to EBITDA of 3.6x.

The company's capital structure is highly leveraged and concentrated in short-term funding. The liquidity position, US$36 million in cash and marketable securities at Sept. 30, 2006, is weak in relation to short-term debt commitments of US$143 million and total debt of $203 million. The company will use 75% of proceeds form the proposed transaction to refinance short term debt, which will lengthen the maturity profile and lessen refinancing risks.

The company plans to continue to invest in productive capacity to attend growing world demand. Capital expenditures planned for the two-year period 2007-2008 total approximately US$60 million, primarily for the construction of a new cooked frozen beef plant and a new slaughter plant. The company plans to fund these investments with a mix of long-term government development agency debt and internal cash. Although Fitch expects that Minerva will continue to benefit from favorable fundamentals in the global beef industry, associated leverage with planned capital expenditures and high working capital requirements may pressure credit protection measures from current levels and could potentially affect the ratings. Under volatile industry conditions, ensuring sufficient cash flows to cover operational and investments needs and generating free cash for the service and repayment of the bond will be a critical challenge for the company.

Minerva 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 slaughters and debones cattle to produce chilled beef, aged and frozen beef, cooked cubed beef, frozen beef variety meats, wet blue leather and other by-products, largely for the export markets, which account for approximately 80% of net revenues. In 2005 Minerva had sales of US$394 million and exports of US$335 million to approximately 80 countries. The company began operations in 1993 as a slaughterhouse and is privately owned by the Queiroz family.

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