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November 2008 Default Case Study Generated on December 15, 2008 Contact: irina.korablev@mkmv.com or yu.jiang@mkmv.com Pilgrim’s Pride Corp (PGPDQ) On November 3, 2008, Pilgrim’s Pride Corp, the largest US chicken producer, failed to pay $25.7 million interest. On December 1,2008, the company and certain of its subsidiaries filed voluntary petition under Chapter 11 of the US Bankruptcy Code in the Northern District of Texas. Company Profile Pilgrim's Pride can spread its tail feathers and do a barnyard strut. As the US's #1 chicken processor, Pilgrim's operations entail breeding, hatching, raising, processing, distributing, and marketing of chicken and turkey. Prepared poultry products are sold under the Pilgrim's Pride, Pierce, Easy-Entree, and Wing-Dings labels to restaurants and grocery stores. The company sells fresh whole and cut-up poultry under the Pilgrim's Pride, Pilgrim's Signature, and Country Pride names; it also produces table eggs and other egg products, and animal feeds and ingredients. Former president and CEO O.B. Goolsby Jr. died in December 2007. COO J. Clinton Rivers, was named president and CEO in 2008. EDF™ as of November 3, 2008: 35.00% Credit Category (not an agency rating): C Expected Default Frequency (EDF) is the probability that a firm will default within a given time horizon. Default is defined as failure to make a scheduled payment or the initiation of bankruptcy proceedings. The main drivers of EDF credit measures are the market value of the firm (asset value), the level of its debt obligations (default point), and the volatility of firm value (asset volatility). The EDF credit measures displayed below are 1-year risk measures, although a 10-year term structure of risk is available within CreditEdge. Default Date: 11/3/2008 This chart shows that Pilgrim’s Pride Corp’s EDF credit measure was high and reached 35.00% prior to its default on November 3, 2008. In May 2008, the company had a market value of assets at $4.3 billion. As grain prices spiked and inflation battered the meat industry, the chicken producer’s market value of assets approached its default point at $1.8 billion in November 2008. The asset volatility jumped to 23% in November 2008 from 16% in December 2007. The decrease of business value plus risky financial perspective led the company to default. Continue to EDF Details November 2008 Default Case Study Generated on December 15, 2008 A B C D E Credit Category A Traditional ratings such as the ones used by the major rating agencies are currently more commonplace than default probabilities. Therefore, to help facilitate users’ understanding, we translated the EDF credit measure into an equivalent credit category. Note that this may bear no relationship to the actual agency rating. This is because Moody’s KMV employs a different approach to measuring credit risk than the rating agencies. For a more detailed discussion of Moody’s KMV’s approach to measuring credit risk, please visit the Quick Tour on our Web site. United States & Canada Large Corporates Asset Volatility & Market Leverage B & C The two main drivers of EDF credit measures are: asset volatility, a measure of business risk, and market leverage, a measure of financial risk. Technically, asset volatility is the standard deviation of the annual change in the market value of the assets. This volatility is expressed in percentage terms. The higher the asset volatility, the less certain investors are about the market value of the firm, and the more likely the firm’s value will fall below its default point. Market leverage is a ratio indicating how much of the market value of the firm’s assets is financed by debt. The measure is calculated as follows: default point divided by the market value of assets. If all else is equal, the higher the asset volatility or market leverage, the higher the EDF credit measure. The asset volatility and market leverage charts in the top right of the “EDF Detail” screen help the user to understand the firm’s EDF credit measure and aid in determining the relative risk, both from a business risk and financial risk perspective. The chart depicts a meter that shows the level of risk on each of the two measures. The levels are relative values computed on a selected group of firms. Market Value of Assets D The market's view of the enterprise value of the firm as determined by the firm's equity value, equity volatility, and liability structure. Because the market value of assets is not directly observable, Moody’s KMV employs a proprietary option-theoretic model to compute this value, which treats the firm's equity value as a call option on the firm's underlying assets. The option theoretic approach enables Moody’s KMV to determine the market value of a firm's assets from knowing only the market characteristics of its equity value and the book value of its liabilities. Default Point E The liabilities that matter in case of default. If the market value of assets falls below this value, it is assumed that the firm will be unable to sell assets or raise additional capital to pay its debts. In general, a firm’s default point is a value close to its short-term liabilities plus half of long-term liabilities. Continue to Relative Analysis November 2008 Default Case Study Generated on December 15, 2008 Relative Analysis The relative analysis feature allows users to chart EDF, fundamental data, and bond values for a selected company or group relative to other companies and/or groups. Users may manually select their own list of peer companies or groups for comparison, or view a Moody’s KMV predefined peer list which is based on an automated algorithm. To determine peers for each company: • MKMV finds all the companies that share the company's Bloomberg Subgroup. Users can also customize and save their own peer company and peer group choices for future use. Pilgrim’s Pride Corp’s default risk had been between Median of US Food & Beverage Group and 75th percentile of US Food & Beverage Group since December 2007. Later, it exhibited more risk and converged to 90th percentile of US Food & Beverage Group in October 2008 and defaulted in November 2008. Continue to Feature Private Company November 2008 Default Case Study Generated on December 15, 2008 Metaldyne Corp On November 1, 2008, Metaldyne Corp failed to make the interest payment on its $142 million 10% junior-lien notes due 2013. 1-Year RiskCalc EDF: 20.14% Moody’s Senior Unsecured Rating: Caa1 As Metaldyne Corp does not have common stock outstanding, its default risk can be assessed using RiskCalc™. RiskCalc™ is a web-based tool that utilizes statistical default probability models for private firms. Models are country-specific, with local validation and calibration using data from sponsor banks. For Metaldyne Corp, we used RiskCalc United States v3.1 to do the analysis. The source of the financial statement information was Moody’s Financial Metrics™. Company Profile Metaldyne Corp, is a global manufacturer of highly engineered metal components for the global light vehicle market. Their products include metal-formed and precision-engineered components and modular systems used in the transmissions, engines and chassis of vehicles. The company serve approximately 200 automotive and industrial customers. Their products are sold primarily to both North American and international light vehicle original equipment manufacturers and Tier I component assemblers, such as a complete engine assembly or drive train assembly. In addition, the company perform design, engineering, machining, finishing and assembly functions. Blue line shows movement in the RiskCalc EDF values and the dotted lines are time series of the median EDF levels of firms with the given rating run through RiskCalc: the Caa dotted line represents the median EDF of North American Corporates with a Caa rating run through RiskCalc. Continue to RiskCalc EDF Drivers November 2008 Default Case Study Generated on December 15, 2008 Percentile Graph, Relative Contribution and Relative Sensitivity Graphs in RiskCalc help us to understand what is driving the firm’s EDF. The PERCENTILE Graph provides a visual representation of how each of the firm’s ratio compares to those of private firms used to build this RiskCalc model. The PERCENTILE Graph plots the percentile of each ratio and provides the actual value in the right-hand column. The colors RED, GRAY and GREEN correspond to the level of risk, HIGH, MEDIUM and LOW associated with the specific value of the ratio. For example, we can observe from the right-hand column that the Leverage Ratio and Current Liabilities to Sales are 282.70% and 119.77% respectively, which place them in the 100th percentile and are solidly in the red in terms of risk. The Retained Earnings to Current Liabilities and ROA are negative, -116.32% and -6.88% respectively. All of these three ratios are in the red in terms of risk for this firm. The Percentile graph does not consider the weight the model places on each ratio in determining the EDF level. Continue to Relative Contribution Analysis November 2008 Default Case Study Generated on December 15, 2008 The RELATIVE CONTRIBUTION graph is helpful in identifying a company’s financial strengths and weaknesses with respect to default risk. This graph explains how each ratio moves the firm’s EDF level away from the average default rate of the firms that were used in the model development. In case of the US 3.1 Model, the average EDF level is 1.7%. Relative Contributions are expressed relative to each other. ROA and Leverage Ratio are the strongest ratios to pull up Metaldyne Corp’s EDF level relative to the average EDF level, 29.93% and 22.77% respectively. Retained Earnings to Current Liabilities, Current Liabilities to Sales, Cash Flow to Interest Expense and Cash to Assets are pulling up the EDF as well. Continue to Relative Sensitivity Analysis November 2008 Default Case Study Generated on December 15, 2008 The RELATIVE SENSITIVITIES graph indicates the relative impact that a small increase in a ratio would have on the EDF, all else being equal. In the Relative Sensitivity analysis, we set the reference point to be the average absolute change in the firm’s EDF level when each ratio is given a small shock. The magnitude of a ratio’s Relative Sensitivity is expressed as a multiple of the average sensitivity across the ratios. Metaldyne Corp’s EDF level is most sensitive to changes in Cash to Assets, Cash Flow to Interest Expense, Change in ROA, ROA and Sales Growth. They have a negative Relative Sensitivity, meaning that the decrease in any of these ratios would lead to an increase in the firm’s EDF level. Change in AR Turnover has the most positive Relative Sensitivity. An increase in the Leverage Ratio, Inventory to Sales and Current Liabilities to Sales would also increase the EDF level. The magnitude of Relative Sensitivity of Cash to Assets is -343.87%, which means that shocking the firm’s Cash to Assets will lead to a change in the EDF level that is 3.44 times the size of the average EDF change from shocking any ratio. Thank you for your interest in CreditEdge and RiskCalc, the revolutionary credit risk management solutions provided by MKMV. 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