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|  | DECEMBER 26, 2003
 CREDIT WEEK FOCUS Lowered Outlooks for the Beef Biz S&P Ratings Services took action on a number of meatpackers and restaurants after the discovery of mad cow disease On Dec. 24, Standard & Poor's Ratings Services announced certain debt-rating actions (see list below) taken on issuers participating in the U.S. beef and affiliated sectors. These actions follow the Dec. 23 announcement by Agriculture Secretary Ann Veneman stating that a cow slaughtered in Washington state earlier this month had bovine spongiform encephalopathy (BSE), otherwise known as mad cow disease. This is the first case in the U.S. and has prompted considerable concern in the country's beef industry. Several nations, including Russia, Japan, South Korea, and Mexico, have already announced bans on U.S. beef imports. The key question is whether the incident (which has been confirmed by a British laboratory) is isolated, as appears to have been the case in May, when a single case of BSE was discovered in Alberta, Canada, or a more widespread and long-lasting issue, as in Britain. The debt ratings on all U.S. beef processors were placed on CreditWatch with negative implications (with the exception of ratings on Smithfield Foods (SFD ), which were already on CreditWatch as of July, 2003). Total rated debt for the beef processors is about $9.2 billion. CHEAPER BEEF. At the same time, the outlook for diversified agribusiness company Cargill, which has a significant presence in the beef processing industry, was revised to negative from stable. The ratings on Cargill were affirmed. In addition, Standard & Poor's has reviewed, on a preliminary basis, the exposure of rated restaurant companies to the potential impact of reduced beef consumption and restaurant traffic. While consumer response is a potential negative for many restaurant companies, a mitigating consideration is the likely decline in beef costs next year due to the ban on U.S. beef imports by certain countries. Although Standard & Poor's expects positive BSE finding to be less significant for restaurants than for beef producers due to menu diversity and food substitution, it has revised the outlook to negative on several restaurant companies with significant reliance on beef, including Carrols Corp., Jack in the Box (JBX ), Morton's Restaurant Group, and Wendy's International (WEN ). Other beef-heavy restaurants already had negative outlooks, including McDonald's (MCD ), American Restaurant Group, CKE Restaurants (CKR ), and Krystal Co. The ratings for all these were affirmed. REVIEW UNDER WAY. Both Brinker International (EAT ) and CBRL Group (CBRL ) are viewed as having less, but still material, exposure. Both companies have strong credit protection measures for their ratings and could absorb some potential negative impact on traffic. However, the outlook on Brinker was revised to stable from positive, as an upgrade isn't likely until the BSE situation is clarified. At this time, S&P is unable to quantify the full ratings impact on the rated beef sector participants. The following, however, are concerns it will address in its review: • Whether this was isolated to a single cow -- or the likelihood of additional cattle being infected with BSE • The immediate and longer-term affect on consumer demand • The price implications for competing proteins • The longer-term effect on cattle prices, processor's margins, inventory valuations, and risk-management positions • The lost sales from beef exports and the impact this will have on the U.S. industry if the export bans remain in place for an extended period of time. S&P will continue to monitor consumers' response to the mad cow concern as well as any spread of the disease. Ratings for beef sector participants could ultimately be affirmed and removed from CreditWatch, and outlooks could revert to prior levels if the impact is modest and if the event turns out to be isolated. On the other hand, credit quality could potentially be reduced if the impact becomes both significant and long lasting.
 All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
BW MALL
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