Fitch has affirmed the ratings for Tyson Foods, Inc.
(Tyson) following today's earnings release and the filing of its most
recent credit facility amendment, as follows:
-- Issuer Default Rating (IDR) 'BBB-';
-- Senior unsecured notes 'BBB-';
-- Credit facility 'BBB-';
-- Commercial paper 'F3'.
Lakeside Farm Industries Ltd. (Lakeside)
-- Term loan 'BBB-'.
The Rating Outlook remains Negative.
Tyson had $4.1 billion of debt at July 1, 2006, including $750 million of 7.25% notes that mature Oct. 1, 2006. This maturity was pre-funded with $1 billion of 6.6% notes due 2016 issued in March. The new notes have a coupon step-up when certain downgrades below investment grade occur. Tyson also has $125 million of notes maturing June 1, 2007.
Tyson's overall liquidity is currently adequate given the availability on its $1 billion credit facility and its $750 million receivables securitization agreements. The $375 million portion of the accounts receivable securitization expiring in August 2006 was renewed for one year and the other $375 million expires in August 2009. Nonetheless, there is risk that overall liquidity can be constrained as a result of downgrades by rating agencies. If additional guarantees on the bank facility and term loan are required as a result of ratings downgrades, Fitch's ratings on the notes will likely be adjusted to reflect their less advantageous position versus the guaranteed facilities. Any further covenant relief or any drawdown on Tyson's credit facility will likely result in a downgrade.
The Negative Outlook reflects the larger than expected magnitude of earnings deterioration during fiscal 2006, the need for multiple covenant waivers, and the still uncertain timeframe for recovery to normalized earnings and credit measures. While recent market factors look positive, any indications that the unprecedented events that occurred this year are structural for the industry rather than temporary will lead to a ratings downgrade. Fitch does not expect a change in financial strategy with the new management in place. Share repurchases or acquisitions are not expected and any activities in these areas before credit metrics improve substantially will result in a ratings review.
Tyson incurred its second consecutive operating loss in the fiscal third quarter ended July 1, 2006. Although Tyson has incurred severe earnings declines, the company has the ability to restore credit metrics to investment grade levels within the near term and sustain them. Tyson's ratings reflect average credit metrics throughout a cycle and incorporate the high degree of cyclicality in the protein industry. The ratings continue to rely on Tyson's unmatched size and market leadership within the protein industry. Fitch is placing only slight reliance on diversification benefits, given the recent weakness in its two largest segments. Occasional animal disease outbreaks are not expected to have ratings impact if they are resolved in a timely manner. Any extreme occurrences would result in a ratings review.
Tyson has obtained covenant relief for its credit facility and Lakeside term loan three times this year to manage through the market downturn and accommodate worsening credit metrics. While Tyson's LTM leverage will deteriorate further before it improves, operating earnings have begun to turn the corner and are expected to display significant growth, particularly in chicken, during the next several quarters. Fitch estimates that after peaking briefly at total-debt-to-operating EBITDA greater than 5.0 times (x) for the fiscal fourth quarter of 2006, Tyson can return to investment grade leverage (less than 3.0x) within the near term.
Fitch expects positive free cash flow in fiscal 2007 as capital expenditures moderate, versus negative free cash flow in 2006 due to weak earnings combined with elevated capital expenditures for several major projects. While Fitch does not expect fiscal 2007 to be back to normalized earnings levels, earnings and cash flow should clearly indicate they are headed in that direction. The Outlook may be revised back to Stable if Tyson approaches normalized earnings levels and credit measures appear sustainable at investment grade levels.
A return to sustainable investment grade credit measures in approximately 12 months is based on the expectation that chicken margins will improve meaningfully. The chicken segment typically comprises the bulk of Tyson's operating earnings; however, in its most recent quarter Tyson posted negative operating earnings in that segment. Nonetheless, market prices for leg quarters and breast meat have rebounded approximately 130% and 30%, respectively, from January 2006 lows. Cold storage inventories are back to normal levels and production cutbacks have led to a more rational environment and growing strength in margins. Tyson plans to cut back production further later this year. Improvement has not yet been visible in Tyson's earnings from chicken due to its usage of forward sales contracts. There is several months lag before better pricing is reflected in Tyson's earnings. Fitch expects Tyson to maintain chicken operating margins in the normal range of 4%-6% range in most years. In addition, Fitch expects that beef margins will return to positive or very near positive levels over time. Tyson's Canadian beef operations continue to hurt beef segment margins and delay a stronger recovery. Although Fitch does not see beef as a material earnings contributor except in its best years, the recent increase in cattle supplies and opening of beef exports to Japan should begin to slowly improve beef margins. The uncertain timing of margin recovery also rests on the impact of higher feed costs, primarily corn, and continued high energy and fuel costs.
See related Tyson press releases dated April 20, 2006 and March 20, 2006, available on the Fitch Ratings web site at www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
-- Issuer Default Rating (IDR) 'BBB-';
-- Senior unsecured notes 'BBB-';
-- Credit facility 'BBB-';
-- Commercial paper 'F3'.
Lakeside Farm Industries Ltd. (Lakeside)
-- Term loan 'BBB-'.
The Rating Outlook remains Negative.
Tyson had $4.1 billion of debt at July 1, 2006, including $750 million of 7.25% notes that mature Oct. 1, 2006. This maturity was pre-funded with $1 billion of 6.6% notes due 2016 issued in March. The new notes have a coupon step-up when certain downgrades below investment grade occur. Tyson also has $125 million of notes maturing June 1, 2007.
Tyson's overall liquidity is currently adequate given the availability on its $1 billion credit facility and its $750 million receivables securitization agreements. The $375 million portion of the accounts receivable securitization expiring in August 2006 was renewed for one year and the other $375 million expires in August 2009. Nonetheless, there is risk that overall liquidity can be constrained as a result of downgrades by rating agencies. If additional guarantees on the bank facility and term loan are required as a result of ratings downgrades, Fitch's ratings on the notes will likely be adjusted to reflect their less advantageous position versus the guaranteed facilities. Any further covenant relief or any drawdown on Tyson's credit facility will likely result in a downgrade.
The Negative Outlook reflects the larger than expected magnitude of earnings deterioration during fiscal 2006, the need for multiple covenant waivers, and the still uncertain timeframe for recovery to normalized earnings and credit measures. While recent market factors look positive, any indications that the unprecedented events that occurred this year are structural for the industry rather than temporary will lead to a ratings downgrade. Fitch does not expect a change in financial strategy with the new management in place. Share repurchases or acquisitions are not expected and any activities in these areas before credit metrics improve substantially will result in a ratings review.
Tyson incurred its second consecutive operating loss in the fiscal third quarter ended July 1, 2006. Although Tyson has incurred severe earnings declines, the company has the ability to restore credit metrics to investment grade levels within the near term and sustain them. Tyson's ratings reflect average credit metrics throughout a cycle and incorporate the high degree of cyclicality in the protein industry. The ratings continue to rely on Tyson's unmatched size and market leadership within the protein industry. Fitch is placing only slight reliance on diversification benefits, given the recent weakness in its two largest segments. Occasional animal disease outbreaks are not expected to have ratings impact if they are resolved in a timely manner. Any extreme occurrences would result in a ratings review.
Tyson has obtained covenant relief for its credit facility and Lakeside term loan three times this year to manage through the market downturn and accommodate worsening credit metrics. While Tyson's LTM leverage will deteriorate further before it improves, operating earnings have begun to turn the corner and are expected to display significant growth, particularly in chicken, during the next several quarters. Fitch estimates that after peaking briefly at total-debt-to-operating EBITDA greater than 5.0 times (x) for the fiscal fourth quarter of 2006, Tyson can return to investment grade leverage (less than 3.0x) within the near term.
Fitch expects positive free cash flow in fiscal 2007 as capital expenditures moderate, versus negative free cash flow in 2006 due to weak earnings combined with elevated capital expenditures for several major projects. While Fitch does not expect fiscal 2007 to be back to normalized earnings levels, earnings and cash flow should clearly indicate they are headed in that direction. The Outlook may be revised back to Stable if Tyson approaches normalized earnings levels and credit measures appear sustainable at investment grade levels.
A return to sustainable investment grade credit measures in approximately 12 months is based on the expectation that chicken margins will improve meaningfully. The chicken segment typically comprises the bulk of Tyson's operating earnings; however, in its most recent quarter Tyson posted negative operating earnings in that segment. Nonetheless, market prices for leg quarters and breast meat have rebounded approximately 130% and 30%, respectively, from January 2006 lows. Cold storage inventories are back to normal levels and production cutbacks have led to a more rational environment and growing strength in margins. Tyson plans to cut back production further later this year. Improvement has not yet been visible in Tyson's earnings from chicken due to its usage of forward sales contracts. There is several months lag before better pricing is reflected in Tyson's earnings. Fitch expects Tyson to maintain chicken operating margins in the normal range of 4%-6% range in most years. In addition, Fitch expects that beef margins will return to positive or very near positive levels over time. Tyson's Canadian beef operations continue to hurt beef segment margins and delay a stronger recovery. Although Fitch does not see beef as a material earnings contributor except in its best years, the recent increase in cattle supplies and opening of beef exports to Japan should begin to slowly improve beef margins. The uncertain timing of margin recovery also rests on the impact of higher feed costs, primarily corn, and continued high energy and fuel costs.
See related Tyson press releases dated April 20, 2006 and March 20, 2006, available on the Fitch Ratings web site at www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.