CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded the Issuer Default Rating (IDR) and other debt ratings of Tyson Foods, Inc. (Tyson; NYSE: TSN) as follows:
--Long-term IDR to 'BBB-' from 'BB+';
--Senior unsecured notes to 'BBB-' from 'BB';
--Senior guaranteed unsecured notes to 'BBB-' from 'BB+'.
Fitch has concurrently affirmed the following rating:
--Secured bank facility at 'BBB-'.
Finally, Fitch has assigned the following new rating:
--Short-term IDR at 'F3'.
The Rating Outlook is Stable.
These rating actions affect approximately $2.5 billion of total reported debt, consisting exclusively of senior unsecured notes, at the fiscal first quarter ended Jan. 1, 2011.
Rating Rationale:
The upgrade in Tyson's ratings to investment grade is due to the company's commitment toward a more conservative capital structure and financial strategy, which is resulting in considerable debt reduction, an extended period of strong cash flow generation, and significantly improved credit metrics. Also incorporated in the upgrade is Fitch's belief that, given lower debt levels and structural improvements in the company's operations, Tyson can maintain leverage, defined as total debt-to-operating EBITDA, below 2.0 times (x) in most years, despite potential cash flow volatility inherent in the protein industry. Tyson's ratings continue to benefit from its leading U.S. market share positions and the diversification provided by its chicken, beef, pork, and prepared food businesses.
At Jan. 1, 2011, Tyson had $810 million of 10.5% notes due March 1, 2014 that are guaranteed by substantially all of its domestic subsidiaries and Tyson Fresh Meats, Inc. (TFM) and $671 million of 7.35% notes due April 1, 2016 that are guaranteed by TFM. Given lower probability of default at the 'BBB-' IDR level, Fitch is not making a rating distinction for these subsidiary guarantees.
Credit Statistics:
During the latest 12 month (LTM) period ended Jan. 1, 2011, total debt-to-operating EBITDA was 1.2x, operating EBITDA-to-gross interest expense was 6.3x, and FFO (funds from operations) fixed-charge coverage was 4.4x. In addition, Tyson generated $601 million of free cash flow (FCF - defined as cash flow from operations less capital expenditures and dividends), nearly double the company's ten-year average of approximately $330 million. Fitch is currently projecting leverage of 1.4x, despite significantly higher grain costs and material margin compression due to additional debt reduction in fiscal 2011. However, higher inventory-related working capital requirements and an increase in capital expenditures to fund projects related to operating efficiencies is expected to result in FCF lower than the company's 10-year average in fiscal 2011.
Liquidity and Upcoming Maturities:
Tyson has generated over $1 billion of operating cash flow and roughly $600 million or more FCF annually since fiscal 2009. At Jan. 1, 2011, the company had $2 billion of liquidity consisting of $1.1 billion of cash and $854 million of asset-based loan (ABL) revolver availability, based on a borrowing base of $1 billion at period end and $146 million of outstanding letters of credit. The company intends to continue to use cash on hand to opportunistically repurchase debt and plans to retire its remaining $315 million of 8.25% notes when they become due on Oct. 1, 2011. Tyson's next significant maturity includes $458 million of 3.25% convertible notes due Oct. 15, 2013. Tyson plans to use cash on hand to repay the outstanding principal should noteholders exercise their early conversion option which requires cash payment.
Today Tyson entered into an amended and restated $1 billion secured revolving line of credit with fall-away collateral provisions should the company receive certain investment grade ratings. The bank agreement, which is no longer an ABL borrowing base facility, terminates on Nov. 29, 2013 but will be automatically extended to Feb. 23, 2016 if the company has achieved certain investment grade ratings or if none of Tyson's 10.5% 2014 notes remain outstanding or are reserved for in a blocked cash collateral account as defined by the credit agreement. Given significant improvement in Tyson's credit profile, Fitch expects the agreement to have more favorable pricing but believes Tyson could be subject to maximum leverage and minimum interest coverage financial maintenance covenants for which it was not previously obligated.
Operating Performance:
Structural improvements in Tyson's operations have resulted in approximately $600 million of operating efficiencies in its chicken operations since 2008, more efficient beef and pork processing facilities, and improved risk management practices. The company has improved live production, yields, mix, and processing flexibility in chicken and has strategically positioned beef and pork processing plants near its supplier base. These dynamics along with strong beef and pork cut-out values are resulting in record operating profitability in pork and margins within the normalized range of 2.5%-4.5% for beef. The operating margin for pork was 14.3% during the first fiscal quarter ended Jan. 1, 2011 versus a normalized range of 4%-6%.
Although Tyson is currently operating at the high end of its 5%-7% normalized margin in chicken, Fitch anticipates high corn prices to pressure segment margins in the near term. Nonetheless, effective hedging, additional operating efficiencies, and modest pricing are expected to partially offset a potential $500 million of incremental grain costs based on current futures prices in fiscal 2011. Tyson has locked in its corn costs at rates below market through the fiscal third quarter of 2011 by using more option contracts, which are considered lower risk, and less undesignated futures contracts, which cause mark-to-market volatility. Furthermore, the company is targeting an additional $200 million of cost savings from its chicken operations and plans to realize about $200 million of price/mix benefits in 2011. Based on Tyson's recent success at achieving operating efficiencies and current USDA Consumer Price Index forecasts for poultry, Fitch views this level of cost savings and pricing as achievable.
Additional information is available at www.fitchratings.com. The issuer did not participate in the rating process other than through the medium of its public disclosure.
Additional sources used by Fitch include the USDA National Agricultural Statistics Service and World Agricultural Supply and Demand Estimates.
Applicable Criteria and Related Research:
--Corporate Rating Methodology (Aug. 16, 2010).
--2011 Outlook: Commodity Foods Credit Upside Exists but Inflationary Cost Pressures and Pricing Concerns Rise (Nov. 16, 2010).
--Fitch Upgrades Tyson's IDR to 'BB+'; Outlook Positive (Aug. 13, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
2011 Outlook: Commodity Foods
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=574425
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