Meat Industry INSIGHTS Newsletter

971250 IBP's $300 Million Medium-Term Note Program Rated A- By S&P

December 16, 1997

New York - Standard & Poor's assigned its single-'A'-minus rating to IBP Inc's $300 million medium- term note program.

At the same time, Standard & Poor's affirmed its single-'A'-minus corporate credit and senior unsecured debt ratings on the company.

About $856 million of total debt is outstanding.

The outlook is negative.

The ratings reflect the company's dominant market position in the highly competitive, commodity based, low-margin domestic beef processing industry. The company also holds a leading position in the pork processing industry. IBP currently has approximately 35% of the U.S. grain fed-beef slaughter market - a significantly larger share than its nearest competitor - and about 19% of the U.S. pork slaughter market.

The company has demonstrated the ability to manage the risks inherent in its commodity businesses through its size, process innovation, and resulting operating efficiency. The company is a low-cost producer, focused on improving profitability through increased sales of value-added products.

The $640 million debt-financed acquisition of Foodbrands America Inc. in May 1997 was a good strategic fit for IBP; while it is red meat-based, Foodbrands business is significantly more value-added and higher margined than IBP's base business.

However, Foodbrands accounts for only about 15% of consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) on a pro forma basis, resulting in only a modest improvement in operating margins.

The company's financial flexibility has weakened during the first nine months of 1997, due primarily to the increased debt burden resulting from the Foodbrands acquisition and higher live cattle and hog prices.

Pretax interest coverage for the nine-month period ended September 1997 was about 5.2 times (x), down from over 20x for the same period of the prior year, and total debt to capital has increased to about 41% at September 1997, up from about 18% in September 1996.

While these financial ratios are not expected to return to pre-acquisition levels in the medium term, a combination of debt reduction and EBITDA growth are expected to result in improved financial measures over time. This is expected to provide IBP with sufficient financial flexibility to weather the cycles in the fresh beef and pork industries.

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