Fitch Ratings has downgraded the Issuer Default Rating (IDR) and other debt ratings of Tyson Foods, Inc. (Tyson; NYSE: TSN) and its Tyson Fresh Meats, Inc. (TFM) subsidiary as follows:
Tyson
--Long-term IDR to 'BB' from 'BB+';
--Senior unsecured notes due 2011 to 'BB-' from 'BB';
--Convertible senior notes due 2013 to 'BB-' from 'BB';
--Senior unsecured notes due 2016 to 'BB' from 'BB+';
--Senior unsecured notes due 2018 to 'BB-' from 'BB';
--Senior unsecured notes due 2028 to 'BB-' from 'BB'.
TFM
--Senior secured notes due 2010 to 'BB+' from 'BBB-';
--Senior secured notes due 2026 to 'BB+' from 'BBB-'.
Fitch has also assigned ratings to Tyson's proposed three-year asset-based loan (ABL) facility maturing in 2011 and five-year senior unsecured notes due 2014 as follows:
Tyson
--ABL bank facility at 'BB+';
--Senior unsecured notes due 2014 at 'BB'.
Fitch has simultaneously withdrawn the 'B' rating on Tyson's short-term IDR and expects to withdraw the 'BBB-' rating on Tyson's existing secured bank facility.
The Rating Outlook is Stable. These rating actions affect the company's approximate $3 billion of total debt on Dec. 27, 2008.
The downgrade is due to $112 million of consolidated net losses during the most recent quarter ended Dec. 27, 2008 and Fitch's expectation that a substantial portion of $168 million of grain related hedging losses and $20 million of negative non-cash inventory adjustments will be realized in the near-term. Tyson continues to benefit from stronger than normal performance in its pork segment and improved year-over-year performance in beef, however, the magnitude of losses in its chicken segment were greater than what Fitch had anticipated and Tyson remains free cash flow negative. Tyson generated $221 million of negative free cash flow (defined as cash flow from operations less capital expenditures and dividends) during the latest 12 month period ended Dec. 27, 2008.
In addition, a requirement of the Dec. 17, 2008 amendment to its existing secured facility included an enhanced collateral requirement clause, which imposes severe penalties if the facility did not have a first priority to Tyson's accounts receivable. The proposed ABL facility does not have a leverage-based financial covenant, but given that borrowings will be based on the value of qualified receivables and inventory, Tyson's access to these funds is more restrictive. Tyson is required to maintain a minimum fixed charge coverage ratio when availability under the facility is less than the greater of 15% of the commitments or $150 million. Furthermore, Tyson's cost of debt capital will increase as a result of these actions.
The Stable Outlook reflects Fitch's expectations that Tyson's credit statistics and cash flow will improve over the next 12 months, after some modest additional deterioration over the next couple of quarters. While weak macroeconomic conditions could dampen demand for meat proteins and margins for Tyson's chicken segment could continue to be negatively affected by potential realized losses on outstanding grain hedge positions, reduced industry production should support poultry pricing in the near term. Lower grain costs and working capital requirements along with reduced capital spending is expected to benefit cash flow later in fiscal 2009 and into fiscal 2010.
Tyson's new ratings reflect the high level of business risk and volatility inherent in the protein industry and Fitch's expectations that absent any unexpected disruptions in the protein industry, Tyson can achieve credit statistics suitable for the new rating level in intermediate term.
Additionally, the ratings consider Tyson's significant size, its diversification among the meat proteins and management's ongoing financial strategy.
On Feb. 19, 2009, Tyson announced that it is arranging a new ABL facility of up to $1 billion which will be secured by cash, accounts receivable (A/R) and inventory. In conjunction with this new facility, Tyson plans to issue $500 million of five-year senior unsecured notes due 2014. The notes will be guaranteed on a senior unsecured basis by Tyson's domestic subsidiaries. The closing of the new ABL credit facility, which will replace Tyson's existing $1 billion secured facility set to expire September 2010, and the sale of the notes are expected to be consummated in March 2009. Proceeds from the note offering will be allocated to the repayment of the 2010 notes when they become due and used to repay borrowings under Tyson's existing $375 million and $225 million A/R securitization facilities which will be terminated.
On Dec. 27, 2008, Tyson had approximately $1.3 billion of liquidity consisting of $166 million of cash, $615 million of revolver availability and $476 million accessible under its accounts receivable securitization program. Significant upcoming maturities include $234 million of 7.95% secured TFM notes due Feb. 1, 2010 and $1 billion of 8.25% unsecured notes due Oct. 1, 2011. Tyson's liquidity or its ability to repay or refinance upcoming maturities is not expected to be adversely affected by these actions.
During the latest 12 month (LTM) period ended Dec. 27, 2008, total debt-to-operating earnings before interest, taxes, depreciation and amortization (EBITDA), excluding approximately $130 million of unrealized hedging losses, was 4.2 times (x) and operating EBITDA-to-gross interest expense was 3.1x. Proforma leverage, also excluding unrealized hedging losses, is estimated at approximately 4.9x and proforma interest coverage will be 2.5x.
For additional information, see Fitch's special report, 'U.S. Commodity Food Industry Outlook Remains Negative - Liquidity and Leverage are the Focus', dated Feb. 13, 2009 and 'Tyson Foods, Inc. Credit Analysis', dated Jan. 9, 2009 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.
Contacts:
Fitch Ratings
Chicago:
Carla Norfleet Taylor, CFA,
+1-312-368-3195
Judi M. Rossetti, CPA, CFA, +1-312-368-2077
Wesley
E. Moultrie II, CPA, +1-312-368-3186
New York:
Cindy Stoller,
+1-212-908-0526 (Media Relations)
cindy.stoller@fitchratings.com