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Rating Action:

Moody's assigns B1 to new Smithfield notes; outlook is stable

18 Jul 2012

Ratings on $1B of senior unsecured notes upgraded to B1 from B2; CFR affirmed at Ba3

New York, July 18, 2012 -- Moody's Investors Service ("Moody's") assigned a B1 rating to the proposed 10-year senior unsecured notes being offered today by Smithfield Foods, Inc ("Smithfield"). In addition, Moody's upgraded ratings on Smithfield's existing senior unsecured debt to B1 from B2 and affirmed its Ba3 Corporate Family Rating and Probability of Default Rating. The rating outlook is stable.

Smithfield plans to use the proceeds from the proposed debt issuance along with up to $100 million of borrowings under its $275 million securitization facility to tender for $160 million of outstanding of 7.75% senior unsecured notes due May 2013 and for $598 million of outstanding 10% secured notes due July 2014. Smithfield expects to tender successfully for approximately half of the 2013 notes and for most of the 2014 notes. Any untendered portion of the 2014 secured notes will be retired through a make-whole payment.

In connection with the proposed debt offering, Smithfield also expects to amend certain agreements related to $1.2 billion of asset-based revolving credit facilities (consisting of a $925 million inventory-based revolving credit line expiring June 2016 and a $275 million accounts receivable securitization facility expiring June 2014) and a $200 million bank term loan (not rated by Moody's) that will provide material liquidity enhancements. The proposed amendment to the inventory-based revolving credit agreement, subject to review and approval by lenders, will release a second lien on the company's real estate and fixed assets, and a separate proposed amendment will extend the maturity date of the bank term loan to 2018 from 2016.

In addition, under the existing credit agreement terms, once the senior secured 2014 notes are retired, the first liens held by the bank term loan lenders on real estate and fixed assets will be released, and the early termination triggers on both of the asset-based facilities will no longer be applicable.

RATINGS RATIONALE

Smithfield's Ba3 corporate family rating reflects its global dominance in the hog production and pork processing business as well as its single protein focus that leaves it somewhat more vulnerable to commodity price volatility than some of its major protein processor competitors. The company's key growth opportunities include expansion in global export markets, particularly in emerging markets, and further development of its processed and branded meats portfolio, which has greater profit margin potential.

Today's one-notch upgrade of the unsecured debt ratings to B1 anticipates the company's use of proceeds from the newly issued unsecured debt to retire $598 million of secured debt, which will remove a significant amount higher priority claims that are currently ahead of unsecured debt holders.

Smithfield Foods, Inc.

Ratings assigned:

Proposed senior unsecured notes due 2022 at B1 (LGD 5, 75%);

Ratings upgraded:

Senior unsecured debt ratings to B1 (LGD 5, 75%) from B2 (LGD 5, 81%);

Ratings affirmed:

Corporate Family Rating at Ba3;

Probability of Default Rating at Ba3;

Ratings to be withdrawn:

Senior secured notes due 2014 at Ba2 (LGD 3, 36%)

The rating outlook is stable.

The proposed refinancing transaction will provide Smithfield with an improved liquidity profile, greater financial flexibility and lower interest costs. These factors will positively influence the overall ratings profile of Smithfield even as pork industry profits retreats from the peak levels experienced last year.

"This debt issuance resolves Smithfield's debt refunding needs for the next several years while leaving a sufficient amount of liquidity to manage through a cyclical decline in operating profits we anticipate in the coming year," said Brian Weddington, a Moody's Senior Credit Officer.

Following a year of record profitability last year in both the hog processing and packaged meats businesses driven partially by tight hog supplies, margins have tightened in recent months as increased hog supplies and spiking corn prices have driven down industry profits. Smithfield reports that has protected about half of its corn input costs over the next year through hedging. Nevertheless, Moody's expect that Smithfield's operating margins will eventually retreat closer to its historical range of 3% - 4% from over 7% reported in fiscal 2011.

Moody's expects that over the next 12 -- 18 months Smithfield will maintain an overall credit profile that is consistent with its current Ba3 CFR, supported by solid liquidity. Smithfield's debt-to-EBITDA leverage has increased recently to over 3 times due to softening operation performance; however Moody's believes there remains sufficient financial cushion to weather a cyclical downturn without negatively affecting the Ba3 rating.

The ratings could be downgraded if Smithfield becomes more aggressive with acquisitions or share repurchases such that credit metrics deteriorate significantly. Other events that could trigger a downgrade may be out of the company's control, including trade disruptions in key export markets, a disease outbreak or a major oversupply condition. Quantitatively, ratings could be lowered if debt to EBITDA is likely to be sustained above 4 times or if EBITA to interest expense is likely to be sustained below 2 times.

An upgrade would likely require debt-to-EBITDA leverage to be sustained at or below 3 times. Greater diversification of revenues and cash flow into more value added products would also support an upgrade.

The principal methodology used in this rating was Global Food - Protein and Agriculture published in September 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

For more information regarding Smithfield, please refer to Moody's Credit opinion on moodys.com.

Smithfield Foods, Inc., headquartered in Smithfield, Virginia, is the world's largest pork producer and processor. Sales for the twelve months fiscal year ended April 29, 2012 were approximately $13.1 billion.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Brian Weddington, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns B1 to new Smithfield notes; outlook is stable
No Related Data.
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