S&P assigns BB issue-level rating to Smithfield Foods' proposed US$650M senior unsecured notes due 2022
July 18, 2012
– Standard & Poor's Ratings Services said today it assigned its 'BB' issue-level rating to Smithfield, Va.-based Smithfield Foods Inc.'s proposed $650 million senior unsecured notes due 2022, which Smithfield plans to issue off its shelf registration. The recovery rating on this debt is '3', indicating our expectation for meaningful recovery (50%-70%) in the event of a
payment default. While the estimated recovery under the company's capital structure pro forma for this debt offering is well above this recovery range, we cap the recovery rating at '3' according to our criteria for unsecured debt of issuers in the 'BB' category (see the criteria research report, "Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt," published on Aug. 10, 2009). The rating is based on preliminary terms and conditions. Pro forma for the proposed transaction, total debt outstanding is
unchanged at about $2 billion.
For the complete recovery analysis, see our recovery report on Smithfield to be published following the release of this report.
We believe the company will use proceeds from the notes issue to repay existing debt outstanding and that this transaction will be leverage-neutral, including our estimate of a pro forma debt-to-EBITDA ratio of about 2.5x, compared with a ratio of 2.4x for the fiscal year ended April 29, 2012.
The ratings on Smithfield Foods reflect our assessment of the company's "fair" business risk profile and "significant" financial risk profile. Key credit factors considered in evaluating Smithfield's business risk profile include its exposure to raw material cost volatility and the possibility of some operating margin compression over the next year. However, we believe
Smithfield has reduced its exposure to corn input costs and increased focus on its core business, which will allow it to better manage future price and raw material cost volatility. We also believe the company will maintain its leading market positions in refrigerated and processed pork offerings, given its global operating footprint, and that good export markets will enable the company to expand its geographic reach, given the favorable long-term global demand outlook for pork-based products.
The company's significant financial risk profile incorporates the possibility that currently improved credit measures could weaken during periods of weaker operating earnings (currently the outlook for Smithfield in fiscal 2013). It also reflects management's stated financial policy of maintaining a maximum net debt-to-EBITDA target of about 3x (excluding acquisitions).