Tyson Foods Credit Hits Junk Status
Last updated Friday, September 5, 2008 9:48 PM CDT in Business
By Kim Souza
THE MORNING NEWS
SPRINGDALE -- Standard & Poor's came down hard on Tyson Foods Inc. on Friday, slashing the Springdale-based meat giant's corporate credit ratings down two notches to junk status, affecting $3.1 billion in debt.
The downgrades will likely raise the cost of future borrowing for Tyson Foods and reduces the market values for the company's bondholders, analysts said. The specifics have not yet been determined.
Tyson Foods declined to comment Friday on the recent downgrade and any additional costs it may bear as a result.
Tyson's corporate credit rating fell from BBB-, the lowest level of investment grade, to BB, the second tier from the top of the junk realm. At the same time, each of its senior unsecured bonds were also downgraded, indicating higher risks associated with the bonds. All of the unsecured bonds were also given a recovery rating, an indication of the timely repayment of principal by the borrower in case of default.
More than $1.8 billion of Tyson's debt received a recovery rating of 5, indicating a modest 10 percent to 30 percent principal recovery potential, according to S&P. Another $2.4 billion of debt was rated a 3 for recovery potential -- classified as a meaningful 50 percent to 70 percent probability for timely repayment in case of default.
A $1 billion revolving credit facility also slipped from investment grade into the junk status. Credit facilities can be complicated with rating triggers that are tripped with negative financial news such as rating downgrades.
Tyson Foods is in the process of amending that $1 billion line of credit to provide further liquidity over the near term, according to S&P debt analyst, Patrick Jeffery.
The prospectus Tyson Foods filed with the Securities and Exchange Commission Thursday discreetly mentioned the company was in the process of renegotiating its credit facilities, which indicates further downgrades are likely, noted Craig Hutson, senior analyst at Gimme Credit, an independent research firm on corporate bonds.
While overall liquidity does not seem to be problematic for Tyson Foods, Ann Gilpin, an analyst with Morningstar, said the company's recent 20 million share stock offering is an indication it expects the downturn in profits to persist.
Analysts said despite Tyson Foods' size and marketshare, the company's cost for borrowing will be more expensive given its higher debt-to-cash ratio.
"It's not unlike consumers who want to get a mortgage, the higher ratio of debt-to-income, the riskier the loan is considered," Gilpin said.
Tyson Foods' income stream has been hit hard in recent quarters from escalating grain costs -- used to feed livestock and poultry -- as well as sagging chicken prices due to excess supply.
The world's largest meat company recently reported its third-quarter net income tumbled more than 90 percent in the year-over-year period, earning $9 million, compared with $111 million a year earlier.
The company's other ratings were left on credit watch with negative implications.
S&P said it will examine the situation further upon the completion of the planned estimated $750 million debt and equity offerings Tyson Foods announced Thursday.
The new $450 million senior convertible notes Tyson Foods plans to issue in the coming weeks also received a junk rating of BB- with a recovery rating of 5 by S&P. These notes will now carry a higher interest rate, because of their lower quality.
The credit rating company was the last of three to keep Tyson Foods' unsecured debt ranked at investment grade. But in June, S&P put the company under strict credit review, citing deterioration in Tyson's operating environment.
Moody's and Fitch Ratings have already downgraded Tyson Foods' unsecured debt into the junk realm. Last summer Tyson Foods said it would pay about $5 million more in interest charges when the company's debt rating was downgraded by Moody's.
Credit Sights of New York, a debt analysis company, said S&P actions were somewhat harsh given the company's leverage levels are still reasonably low, and its ample liquidity.
Tyson Foods stock rebounded slightly from the 8.5 percent loss on Thursday following the news of its fundraising efforts. Tyson Foods closed Friday at $14.23, up 35 cents. For the past 52 weeks the share price has ranged between $19.50 to $12.81.
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