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Rating Action:

Moody's upgrades Smithfield Foods' CFR to Ba2

24 Aug 2016

Approximately 2.3 billion of debt instruments affected.

New York, August 24, 2016 -- Moody's Investors Service, ("Moody's") today upgraded ratings of Smithfield Foods, Inc. and its subsidiaries (together "Smithfield"). Upgrades include the Corporate Family Rating (CFR) to Ba2 from Ba3, Probability of Default Rating to Ba2-PD from Ba3-PD, and senior unsecured debt ratings to Ba3 from B1. Moody's affirmed the company's Speculative Grade Liquidity rating at SGL-1. The rating outlook is stable.

The upgrades reflect Moody's expectation that Smithfield will maintain solid credit metrics and relatively stable operating performance. "Stronger earnings and modest debt levels over the past year have resulted in declining financial leverage, including debt/EBITDA that is likely to fall below 2.5 times within six to nine months," commented Moody's Senior Credit Officer, Brian Weddington. Moody's forecast includes the effect of $400 million of dividends expected to be distributed in fiscal 2016.

Since the 2013 leveraged merger with Hong Kong based WH Group, Smithfield has repaid $900 million of debt and doubled operating profit to over $850 million. Earnings improvement has largely come through market share gains and increased volumes in US packaged meats and increased exports to China.

While both domestic and export demand for US pork should remain in balance with supply at least over the next year, the potential for over-expansion of US hog supply remains a key concern. Low feed prices and expanding slaughter capacity driven by rising US pork exports are pushing hog production to record levels this year. This has depressed US hog prices over the past 18 months and resulted in heavy operating losses for US hog producers, including Smithfield. In the first half of 2016, its hog production segment recorded a loss of $68.3 million. Based on Moody's expectation for continued overall growth in U.S. hog supplies in anticipation of future processing capacity expansion, the rating agency expects that losses in Smithfield's hog production segment will continue for the foreseeable future.

In recent years, however, losses in Smithfield's hog production segment have been fully offset by earnings in its expanding fresh pork business, which includes its growing pork exports. In addition, the lower hog values have translated into lower input costs for its highest margin packaged meats segment that is generating record sales and over 70% of total operating profits. Thus, as long as the hog production and fresh pork segments are at least break-even on a combined basis, Smithfield should be able to grow earnings and cash flow. This should help Smithfield maintain financial leverage within the bounds Moody's feels is appropriate for a Ba2 rating.

Moody's has taken the following rating actions:

Smithfield Foods Inc. and its subsidiaries:

Ratings upgraded:

Corporate Family Rating to Ba2 from Ba3;

Probability of Default Rating to Ba2-PD from Ba3-PD;

$446.8 million 7.75% senior unsecured notes due 2017 to Ba3 (LGD 4) from B1 (LGD4);

$446.4 million 5.250% senior unsecured notes due 2018 to Ba3 (LGD 4 from B1 (LGD 4);

$349.3 million 5.875% senior unsecured notes due 2021 to Ba3 (LGD 4) from B1 (LGD 4);

$900.2 million 6.625% senior unsecured notes due 2022 to Ba3 (LGD 4) from B1 (LGD 4).

Ratings affirmed:

Speculative Grade Liquidity Rating at SGL-1.

The rating outlook is stable.

RATINGS RATIONALE

The Ba2 Corporate Family Rating reflects Smithfield's modest financial leverage and its relatively stable operating performance considering its high exposure to highly volatile input prices. The company's single-protein concentration and high exposure to commodity-like product sales are balanced against Smithfield's large scale and its global leadership in hog production, fresh pork, and value-added packaged pork products.

The SGL-1 rating reflects Smithfield's very good liquidity, including strong internal cash flows and ample back-up lines. Covenant cushions under the company's $1 billion inventory-backed credit facility are comfortable with $763 million of EBITDA cushion or 70% and $1.2 billion of indebtedness cushion or 56%.

The senior unsecured ratings are one notch below the CFR primarily due to the higher priority rank of a $1.025 billion asset-backed liquidity facility.

A rating upgrade could occur if Moody's expects that Smithfield is likely sustain debt/EBITDA below 2.0x. In addition, the company would need to establish a track record of overall earnings stability before an upgrade would be considered. The ratings could be downgraded if debt/EBITDA is sustained above 3.0x. Other events that could trigger a downgrade are partly out of the company's control, including trade disruptions in key export markets, a disease outbreak or a major oversupply condition.

The principal methodology used in these ratings was that for the Global Protein and Agriculture Industry published in May 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Smithfield Foods, Inc., headquartered in Smithfield, Virginia, is the world's largest pork producer and processor. Revenue for fiscal year 2015 was approximately $14 billion. Hong Kong-based parent company, WH Group (formerly, Shuanghui International Holdings Ltd), is an investment holding company that controls the largest poultry producer in China (Henan Shuanghui Investment & Development Co., Ltd).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit 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

No Related Data.
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