Moody's downgrades Smithfield Foods' rating to B1 amid expected closing of company acquisition by Shuanghui International Holdings
September 26, 2013
– Approximately $1.5 billion of debt instruments affected.
Moody's Investors Service ("Moody's") has lowered the ratings of Smithfield Foods, Inc. ("Smithfield") as a consequence of the closing expected today of the acquisition of Smithfield by Shuanghui International Holdings Ltd ("Shuanghui") through a merger with its wholly-owned subsidiary, Sun Merger Sub, Inc. The downgrades include the Corporate Family Rating to B1 from Ba3, Probability of Default Rating to B1-PD from Ba3-PD, senior unsecured debt ratings to B2 from B1 and Speculative Grade Liquidity rating to SGL-2 from SGL-1. The rating outlook is stable. This concludes the ratings review that began on May 30, 2013 following the acquisition announcement.
Moody's also has withdrawn the Corporate Family Rating, Probability of Default Rating and rating outlook of Sun Merger Sub, as it will cease to exist following its merger into Smithfield. Moody's has affirmed the B2 ratings on Sun Merger Sub's senior unsecured debt, which will be obligations of Smithfield at closing. For details on Sun Merger Sub, Inc. please visit www.moodys.com
The B1 Corporate Family Rating reflects the high financial leverage resulting from the acquisition and uncertainty regarding Smithfield's long-term operating strategy under new ownership. Smithfield's ratings also reflect its global leadership in hog production and pork processing and its single-protein focus that results in high exposure to commodity price volatility.
Moody's is not currently anticipating major changes to Smithfield's business profile in the near-term -- Shuanghui plans to operate Smithfield as an independent operating company and will contractually retain most of the current senior management team for at least three years. Smithfield plans to use free cash flow to reduce debt by the $900 million raised to fund the acquisition within two years.
The SGL-2 rating reflects Smithfield's good liquidity profile including strong internal cash flows, adequate back-up lines and an asset base that is mostly unencumbered. Leverage covenant cushion at closing under the company's $1billion inventory-backed credit facility is less than ideal at below 15%; however this cushion should grow over time as the company reduces debt levels.
The following rating actions have occurred:
SMITHFIELD FOODS, INC.
Corporate Family Rating to B1 from Ba3;
Probability of Default Rating to B1-PD from Ba3-PD;
$500 million 7.75% senior unsecured notes due 2017 to B2 (LGD 4, 65%) from B1 (LGD 5, 75%);
$1,000 million 6.625% senior unsecured notes due 2022 to B2 (LGD 4, 65%) from B1 (LGD 5, 75%);
Speculative Grade Liquidity Rating to SGL-2 from SGL-1.
The rating outlook is stable.
SUN MERGER SUB, INC.
$500 million 5.250% senior unsecured notes due 2018 at B2 LGD-4 (65%);
$400 million 5.875% senior unsecured notes due 2021 at B2 LGD-4 (65%).
Corporate Family Rating at B1;
Probability of Default Rating at B1-PD.
The senior unsecured ratings are one notch below the CFR due to the higher priority rank of the existing $1 billion asset-based liquidity facility.
Shuanghui will consummate the acquisition of Smithfield through a merger of Sun Merger Sub, Inc., a wholly owned subsidiary of Shuanghui, into Smithfield with Smithfield being the surviving company. Following the merger, Smithfield will be a wholly-owned subsidiary of Shuanghui. The transaction is valued at approximately $7.2 billion, including the assumption of debt. Shuanghui will acquire all of the outstanding shares of Smithfield at a price of $34/share or approximately $4.7 billion and assume approximately $2.5 billion of Smithfield debt.
Moody's estimates Smithfield's closing leverage at 5 times debt/EBITDA on a standalone basis, which the company plans to reduce steadily through free cash flow. Consolidated closing leverage at Shuanghui will approximate 5.5 times. Shuanghui plans to reduce debt balances at Smithfield from $3.4 billion at closing to below $2.5 billion within 24 months after closing, which should reduce debt/EBITDA below 4 times. Moody's assumes that Smithfield will not make any shareholder distributions before it meets its targeted debt levels.
An upgrade is unlikely in the near-term. However, if Smithfield meets its targeted pace of deleveraging, and debt-to-EBITDA leverage is likely to be sustained below 3.5 times, an upgrade could occur. The ratings could be downgraded if Smithfield fails to reduce debt/EBITDA leverage below 4.5 times within 12 months. Other events that could trigger a downgrade may be out of the company's control, including trade disruptions in key export markets, a disease outbreak or a major oversupply condition.
Sun Merger Sub, Inc., a wholly owned subsidiary of Shuanghui International Holdings was formed solely for the purpose of acquiring Smithfield.
Hong Kong-based Shuanghui International Holdings, is an investment holding company that controls the largest poultry producer in China (Henan Shuanghui Investment & Development Co., Ltd). Shuanghui, currently an important Smithfield export customer, intends to operate Smithfield as a wholly-owned independent operating subsidiary.
Smithfield Foods, Inc., headquartered in Smithfield, Virginia, is the world's largest pork producer and processor. Sales for the fiscal year ended April 28, 2013 were approximately $13.2 billion.
The principal methodology used in this rating was the Global Protein and Agriculture Industry published in May 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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