Fitch Ratings raises Smithfield Foods' long-term issuer default rating to BB from BB-, says company's credit profile has improved following its refinancing transaction announced on July 18; outlook stable
July 19, 2012
– Fitch Ratings has taken the following rating actions on Smithfield Foods, Inc. (Smithfield; NYSE: SFD):
--Long-term Issuer Default Rating (IDR) upgraded to 'BB' from 'BB-';
--Asset-based inventory revolver affirmed at 'BB+';
--Secured notes affirmed at 'BB+';
--Term loan downgraded to 'BB' from 'BB+';
--Senior guaranteed unsecured notes upgraded to 'BB' from 'BB-';
--New senior unguaranteed unsecured notes assigned 'BB-' rating.
The Rating Outlook is Stable. At April 29, 2012, Smithfield had approximately $2 billion of total reported debt.
The rating upgrades reflect Fitch's view that Smithfield's credit profile has improved following a refinancing transaction announced yesterday. Maturities have been extended, liquidity has been enhanced, and the firm's weighted average cost of debt has been lowered. Additionally, credit protection for unsecured bond holders has strengthened as collateral has been released on Smithfield's term loan.
The downgrade of the term loan incorporates the fall away of security for this obligation following the repayment of the firm's 10% secured notes. Upon completion of the tender offer described below, the majority of Smithfield's outstanding debt will be unsecured.
Debt Issuance and Tender Offer:
On July 18, 2012, Smithfield issued $1 billion of 10-year 6.625% senior unsecured notes due Aug. 15, 2022 at a price of 99.5 of par and a spread of 515 basis points over treasuries. The notes were issued under Smithfield's June 25, 2010 shelf registration statement and rank pari passu with other senior indebtedness. However, unlike Smithfield's other debt obligations, the notes do not benefit from a subsidiary guarantee.
Proceeds from the debt issuance will be used to fund the cash tender of any and all of Smithfield's 10% senior secured notes due July 15, 2014 and 7.75% senior unsecured notes due May 15, 2013. At April 29, 2012, $589 million of the 10% notes and $160 million of the 7.75% notes were outstanding. Remaining proceeds will be used for general corporate purposes.
Terms and conditions of the tender include a total consideration equal to the redemption price payable had Smithfield exercised its option to affect a make-whole redemption of the 10% notes.. The tender offer deadline is Aug. 14, 2012.
Credit Statistics and Operating Performance:
Smithfield continues to operate within its stated financial parameters of net debt-to-adjusted EBITDA at or below 3.0x, with a ceiling of 4.0x, total debt-to-capitalization of less than 40%, and liquidity of $500 million - $1 billion. For the year ended April 29, 2012, total debt-to-operating EBITDA was 2.0 times (x) while operating EBITDA-to-gross interest expense was 5.0x. Fitch estimates leverage in the 2.3x-2.4x range pro forma for the refinancing transaction.
During fiscal 2012, Smithfield delivered another year of above normal operating results with approximately $1 billion of operating EBITDA, $570 million of operating cash flow, and $279 million of discretionary free cash flow. The firm's EBITDA margin was 7.5%, well above an average of about 6% since 2001.
In conjunction with the debt issuance and tender offer announcement, Smithfield revised down its fiscal 2013 outlook for its Hog Production segment. Hedge positions in place prior to the sharp run-up in grain prices are expected to mitigate a meaningful portion of the negative impact of higher hog raising costs. However, due to the blended effect of hedge gains and higher spot corn prices over the course of the year, the company anticipates marginal hog production profitability.
Fitch expects Smithfield to navigate through the current period of elevated grain costs with effective hedging and moderate pricing. Furthermore, tight protein supply and healthy exports continue to support operating fundamentals going forward.
Liquidity and Maturities:
At April 29, 2012, Smithfield had $1.5 billion of liquidity consisting of $324 million of cash and $1.1 billion of revolver availability. Availability is net of $96 million of letters of credit and $65 million of borrowings under unsecured international facilities with $106 million of capacity.
Smithfield's $925 million inventory revolver and $275 million securitization facility expire June 9, 2016 and June 9, 2014, respectively. With the refinancing of the 10% secured notes, the revolver's springing maturity feature will be eliminated and significant maturities over the next three years will be limited to $400 million of 4% convertible notes, excluding $27 million of unamortized discounts, due June 30, 2013.
Smithfield has considerable cushion under its maximum leverage and minimum interest coverage financial maintenance covenants. Funded debt-to-capitalization was approximately 37% at April 29, 2012 versus a limit of 50% EBITDA-to-interest, as defined by the credit facility, is estimated to be over 5.0x versus a minimum threshold of 2.5x. Smithfield's senior unsecured notes require the company to repurchase the notes at 101% of principal plus interest if there is a change of control.
What Could Trigger A Rating Action?
Future developments that may, individually or collectively, lead to a positive rating action include:
--Meaningful debt reduction which Fitch believes lessens negative impacts from periodic downturns in the pork industry; or
--Total debt-to-operating EBITDA consistently below 2.0x due to a combination of debt reduction and above average operating performance.
Future developments that may, individually or collectively, lead to a Negative rating action include:
--A more aggressive financial strategy, with respect to acquisitions or share repurchases, that leads to materially higher debt levels; or
--A sustained period of considerably weaker operating earnings and cash flow such that total debt-to-EBITDA remains consistently above 5.0x.