09de fevereiro de 2006

 

Issuer Comment: Cosan S.A. Indústria e Comercio

MOODY'S ASSIGNS A Ba2 TO COSAN'S ADDITIONAL NOTE ISSUANCE OF UP TO USD 150 MILLION

Moody's Investors Service ("Moody's") assigned a Ba2 foreign currency rating to Cosan S.A. Indústria e Comércio's ("Cosan") proposed issuance of an additional USD 100 million to USD 150 million of senior unsecured perpetual notes to the USD 300 million senior unsecured notes recently issued. The new notes will be subject to the exact same terms and conditions as the USD 300 million perpetual notes including the guarantees from Usina da Barra S.A. and Franco Brasileira S.A. Açúcar e Álcool. Concurrently, Moody's affirmed Cosan's Ba2 global local currency scale corporate family rating and A1.br Brazilian national scale rating. The rating outlook is stable.

The proceeds from the additional issuance (USD 100 to USD 150 million) will be used primarily to refinance a

portion of the debt assumed as a result of Cosan's acquisition of Açucareira Corona S.A. ("Corona"), a sugar company with a crushing capacity of 6 million tons, for a total consideration of approximately BRL 640 million, including approximately BRL 241 million of assumed debt (excluding self-liquidating PESA debt). The acquisition of Corona, however, is being funded primarily from Cosan's BRL 844 million in proceeds raised from its successful IPO in November, 2005. Moody's regards this acquisition as strategic given the company's stated plans to increase capacity and Corona's attractive geographic location in one of the world's most productive regions for sugar cane cultivation. At the same time, Moody's notes the significantly higher purchase price paid for this acquisition compared to previous acquisitions.

Cosan's Ba2 rating continues to reflect its solid position as the largest sugar and ethanol producer in Brazil and the third-largest sugar producer in the world, the favorable industry fundamentals for both sugar and ethanol producers in Brazil, Cosan´s position as the lowest cost producer, and its improved credit profile and corporate

governance following the recent IPO and issuance of the perpetual notes. However, Cosan´s ratings are constrained due to its exposure to volatile sugar and ethanol prices, exchange rate variation, the company's lack of product diversification, and the risks arising from its acquisitive strategy in the fragmented Brazilian sugar market. Additionally, the rating also reflects Cosan´s history of high seasonal working capital variations and very significant investments leading to negative free cash flow generation in some years, as well as the risks arising from its risk management exposure policies and practices, which may impact EBITDA, cash flow and interest expense.

Cosan´s Ba2 global local currency corporate family rating could be raised if the company is able to increase its scale and product diversification, reducing the level of correlation between sugar and ethanol. An improvement in the ratings or outlook could also result from a significant increase in the percentage of total world sugar

production that trades in the unregulated markets. Quantitatively, positive rating momentum could result if the company were to generate free cash flow to debt in the range of 9-12% (currently slightly negative) and EBIT/Interest in the 4x-5x range on a sustainable basis.

At the same time, Cosan´s current ratings could come under negative pressure if the company sees a reduction in its percentage of sales derived from exports (currently 60%); if the central south region of Brazil, Cosan´s only area of production, suddenly experiences a material adverse event such as a natural catastrophe or a prolonged drought; or if Cosan´s acquisitive strategy leads to a large debt-financed acquisition that leads to a deterioration of current credit metrics. Quantitatively, Cosan´s ratings could come under negative pressure if free cash flow remains negative at the end of its FY 2007 and/or if Debt/EBITDA increases to above 4x (excluding PESA debt).

Ratings assigned:

--USD 100 to USD 150 million of guaranteed senior unsecured perpetual notes: Ba2

Ratings affirmed:

-- Global local currency scale corporate family rating: Ba2
-- Brazilian national scale corporate family rating: A1.br
-- Foreign currency senior unsecured rating: Ba2

Cosan S.A. Indústria e Comercio, headquartered in Sao Paulo, Brazil, is the third largest sugar producer in the

world. In 2004/2005 it crushed more than 26 million tons of sugar cane in fourteen mills located in the Central

South region of Brazil, with sugar sales of 2.3 million tons and ethanol sales of 825 million liters.



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