Fitch Affirms Tyson's IDRs at 'BBB/F2'; Rates $1.25B Revolver 'BBB'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the credit ratings of Tyson Foods, Inc. (Tyson; NYSE: TSN). Fitch has also assigned a 'BBB' rating to Tyson's new five-year $1.25 billion senior unsecured revolving credit facility.

The following ratings have been affirmed:

--Long-term Issuer Default Rating (IDR) at 'BBB';

--Unsecured term loans at 'BBB';

--Senior unsecured notes at 'BBB';

--Short-term IDR at 'F2'.

The Rating Outlook is Stable.

At June 28, 2014, Tyson had $1.8 billion of total debt.

Tyson's new revolving credit facility, which replaces the firm's previous $1 billion revolver, matures on Sept. 25, 2019 and can be upsized by $500 million. The facility is guaranteed by Tyson's wholly-owned subsidiary Tyson Fresh Meats (TFM) until TFM no longer guarantees Tyson's 2016 notes. Financial maintenance covenants include 1) a maximum debt-to-capitalization ratio of 65% through Dec. 27, 2014 and 60% thereafter and 2) a minimum interest expense coverage ratio of 3.75x. The credit agreement also limits the aggregate amount of total secured debt and unsecured subsidiary level debt to 15% of certain consolidated net tangible assets.

KEY RATING DRIVERS

Deleveraging Anticipated

Tyson's financial strategy following the acquisition of The Hillshire Brands Co. (Hillshire) on Aug. 28, 2014 entails deleveraging. Debt reduction will be enabled by the Tyson's meaningful free cash flow (FCF - defined as cash flow from operations less capital expenditures and dividends) which Fitch projects will be at least $600 million annually. Fitch's baseline forecast is that total debt-to-operating EBITDA (leverage) will decline to 2.0x - 2.5x by the end of fiscal 2016. Pro forma leverage, based on March 2014 EBITDA and $8.9 billion of total debt, is 3.2x. Financing for the acquisition included $2.5 billion of term loans, $3.25 billion of senior notes, $1.5 billion of tangible equity units, and $0.9 billion of common equity.

Hillshire Expands Value-Added Products

Fitch views the purchase of Hillshire as in line with Tyson's strategy of expanding in prepared food and other value-added products and expects the transaction to be margin accretive. The combination of Tyson and Hillshire results in a complementary portfolio of well-recognized brands; including Tyson, Hillshire Farm, Jimmy Dean, and Ball Park, and strength in the faster growing breakfast category. According to Tyson, prepared foods will represent about 18% of Tyson's sales and 20% of its operating income on a pro forma basis, up from 9% and 5% during the latest 12 month (LTM) period ended March 29, 2014, due to the addition of Hillshire.

Significant Synergies Anticipated

Tyson expects $500 million plus of operational, purchasing, and distribution savings within three years of closing its acquisition of Hillshire. At least $225 million is expected to be realized in fiscal 2015 due partially to the closing of three prepared foods plants. Fitch believes Tyson can achieve targeted synergies given that the firm realized $1 billion plus of operational efficiencies in chicken and successfully closed inefficient beef plants from 2008 through 2013.

Positive Earnings Trends

Tyson's consolidated sales increased 7.8% to $27.5 billion while its operating income increased 17.2% to $1.1 billion during the nine-month period ended June 28, 2014. Operating margins in chicken, beef, pork, and prepared foods were 8.2%, 1.7%, 7.6% and (0.5%), respectively. Tyson currently views normalized margins for chicken as 5%-7%, for beef as 2.5%-4.5%, for pork as 6%-8%, and for prepared foods as 4%-6%. Tyson began reporting international results separately in the second quarter of fiscal 2014. The segment consists of the firm's chicken operations in China and India following the divestiture of operations in Mexico and Brazil announced earlier this year. Operating losses in international totaled $73 million for the nine-months ended June 28, 2014. The loss was due to poor operational execution in Brazil, challenging market conditions in Brazil and China, and costs incurred to grow internationally.

Fitch expects Tyson's results to stay strong through fiscal 2015, given good protein demand and lower grain cost. Tyson is projecting a $400 million decline in feed costs, a margin of 10% plus in chicken, and a margin of 6%-8% in pork. Profitability for beef is expected to be similar to levels in 2014 and to improve by $50 million in the international segment due to better pricing. Fitch believes prepared foods' normalized margin will increase meaningfully due to the acquisition of Hillshire, which had an EBIT margins near 10% in fiscal 2013.

Liquidity and Debt Structure

At June 28, 2014, Tyson had $587 million of cash, $2 million in short-term investments and, after excluding $41 million of letters of credit, $959 million available under the firm's previous $1 billion unsecured revolver. Total debt-to-capitalization was 21% at June 28, 2014 well below the covenant thresholds discussed above.

Upcoming maturities include Hillshire's $400 million 2.75% notes due 2015, Tyson's $638 million of 6.6% senior unsecured notes due April 1, 2016, and $1.3 billion of term loans due three years after the Aug. 28, 2014 closure of the Hillshire transaction. Hillshire had $944 million of total debt, which Fitch rates 'BBB', at June 28, 2014.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to an upgrade include:

--An upgrade is not likely in the next 12-18 months due to the meaningful increased leverage following the acquisition of Hillshire and potential integration risk.

--Factors that could result in an upgrade over the intermediate term include: leverage in the low 2.0x range, realization of targeted synergies, and at least 100 basis points of EBITDA margin expansion. Average annual FCF north of $600 million and the maintenance of at least $1 billion of liquidity, inclusive of cash and revolver availability, would also be required.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Leverage in the high 2.0x range or more for two years post-closure of the Hillshire transaction, due to lower than expected debt reduction or sluggish earnings growth, and weak FCF.

--Weak top-line growth or meaningful margin contraction due to a downturn in demand or a prolonged protein supply/demand imbalance resulting from animal diseases or changes in feed cost.

--Additional material size acquisitions over the near term or aggressive financial policies relating to dividends and share repurchases would be viewed negatively.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 2014);

--'Tyson Foods, Inc. Credit Update' (August 2014);

--'Fitch Rates Tyson's $3.25B Notes Offering 'BBB'; Outlook Stable' (August 2014);

--'Fitch Affirms Tyson's IDRs at 'BBB/F2'; Expects to Rate $3.25B Notes 'BBB'; Outlook Stable' (July 2014);

--'Fitch Rates Tyson's $2.5 billion Term Loans 'BBB' (July 2014);

--'Fitch: Tyson's Ratings Currently Unaffected by Conclusion of Bidding' (June 2014);

--'Fitch Affirms Tyson's Ratings on Offer to Buy Hillshire; Outlook Revised to Stable' (May 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Tyson Foods, Inc.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=759387

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=887574

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