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Global Credit Research - 10 Feb 2011
New York, February 10, 2011 -- Moody's Investors Service upgraded Smithfield Foods Inc.'s corporate
family and probability of default ratings to B1 from B2 given the company's
material and permanent debt reduction following strong operating performance
since the beginning of 2010 and particularly during the first two quarters
of the company's fiscal 2011 due to the combination of strong pork
industry fundamentals, commitment to deleveraging, and benefits
from its pork restructuring initiated in February 2009. Smithfield's
liquidity is expected to remain strong despite headwinds from high corn
prices. Moreover, Moody's believes that as the current
peak cycle performance wears off the company will continue to reflect
credit metrics consistent with a B1 corporate family rating. The
company has repaid a significant amount of long term debt - about
$900 million during fiscal 2011, lowering debt by about 30%.
The rating outlook is stable.
Smithfield Foods, Inc.
Corporate Family Rating to B1 from B2;
Probability of Default Rating to B1 from B2;
Senior unsecured debt ratings to B3 (LGD5, 88%) from Caa1
(LGD5, 84%); and
Senior secured notes due 2014, to Ba3 (LGD3, 42%) from
B1 (LGD3, 34%).
Speculative Grade Liquidity at SGL-1
The rating outlook is stable.
Smithfield's B1 corporate family rating reflects its concentration
in a single protein (pork), its history of volatile financial performance,
and its low operating margins given the commodity nature of the majority
of its products. Lately, strong industry fundamentals driven
primarily by tight hog supplies have led to better margins in hog production
and record profitability in pork processing and packaged meats.
A pork restructuring plan initiated in February 2009 is achieving considerable
cost savings and improved overall efficiency. Exports should continue
to support revenue growth and pricing.
The notable increase in feed costs adds an element of uncertainty once
the company's favorable hedges begin to roll off. However,
the company has focused on material debt reduction which mitigates the
impact of lower cash flow due to the higher input costs.
Over the long term, the company will remain vulnerable to the inherent
risks associated with unanticipated outbreaks of animal disease,
the potential for politically motivated trade barriers and weather related
Credit metrics are expected to continue to improve modestly over the near
term due to debt repayment and near top of the cycle operating margins.
Leverage is high at 4.1 times debt-to EBITDA as of LTM October
2010 but trending lower and interest coverage should strengthen to over
2 times EBITA-to-interest expense over the near term.
Given tight supply in hogs, prices should continue to bode well
for Smithfield. Profitability is likely to be pressured beyond
fiscal 2011 given higher input costs and the likely increase in hog production
over time. Smithfield's current liquidity is very good.
What Could Change the Rating - Down
Ratings could be lowered if debt to EBITDA is likely to be sustained above
5 times debt-to-EBITDA or if EBITA- to- interest
expense is likely to be sustained below 2 times.
What Could Change the Rating - Up
A positive outlook would likely be supported if margins were sustained
despite expected pressure due to high input costs. An upgrade would
likely require leverage reflecting greater stability at lower than 3 times
debt-to-EBITDA and cash flow that reflects less dependence
on the commodity segment of the company's operations given its concentration
in only one protein.
For more information regarding Smithfield, please refer to Moody's
Credit Opinion on moodys.com.
Moody's last rating action for Smithfield was on September 14, 2010.
The principal methodology used in this rating was Global Food -
Protein and Agriculture published in September 2009.
Smithfield Foods, Inc., headquartered in Smithfield,
Virginia, is the world's largest pork producer and processor.
Sales for the twelve months ended October 10, 2010 were approximately
Information sources used to prepare the credit 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
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
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independent third-party sources. However, Moody's
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validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
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Please see the ratings disclosure page on our website www.moodys.com
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades Smithfield's CFR to B1; Outlook Stable
250 Greenwich Street
New York, NY 10007
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