CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to Tyson Foods, Inc.'s (Tyson; NYSE:TSN) $3.25 billion senior unsecured notes offering. Proceeds from the offering will be used to partially finance the company's previously announced $8.6 billion acquisition of The Hillshire Brands Company (Hillshire, 'BBB/F2'/Stable Outlook), discussed below. Tyson is expected to issue the notes in multiple tranches.
The new senior unsecured notes will be issued under the firm's indenture dated June 1, 1995 and will rank pari passu with Tyson's existing unsecured debt. The notes will also be guaranteed on a senior unsecured basis by Tyson Fresh Meats Inc. and contain a change of control provision. This provision conveys to the holder the right to require Tyson to repurchase the notes at a price equal to 101% of the aggregate principal amount plus accrued and unpaid interest to the date of repurchase upon a change of control and ratings downgrades below investment grade by two of three rating agencies.
KEY RATING DRIVERS
Transaction Financing, Divestiture Proceeds, Deleveraging Plans
Tyson's ratings reflect the company's deleveraging plans and the estimated $2.4 billion of equity issued to partially finance the Hillshire acquisition. Fitch expects total debt-to-EBITDA to decline to between 2.0x and 2.5x within two years of the transaction closing, which is expected to occur by Sept. 27, 2014, due to debt reduction and EBITDA growth. Tyson plans to use net proceeds from the recently announced sale of its poultry businesses in Mexico and Brazil for $575 million to pay down debt. Moreover, Fitch's baseline projection is that Tyson will generate at least $600 million of annualized free cash flow (FCF) following its acquisition of Hillshire.
Pro Forma Capital Structure, Equity Offerings
Financing for Hillshire consists of approximately $6 billion of debt and $2.4 billion of equity. The debt portion of the financing includes $2.5 billion of unsecured term loans, $3.25 billion of senior notes, and about $205 million of senior amortizing notes associated with tangible equity units (TEUs). Pro forma leverage, based on March 2014 data and roughly $8.9 billion of total debt, is 3.2x.
On July 30, 2014, Tyson announced that it priced public offerings for 24 million shares of its class A common stock and 30 million TEUs. Net proceeds from the common stock issuance, assuming no over-allotment, totaled $873 million (or $1 billion with the full 3.6 million over-allotment option). The TEUs, which are composed of a prepaid stock purchase contract and a senior amortizing note, were sold at $50 per unit for net proceeds of $1.5 billion. The TEUs would get substantial equity treatment.
Hillshire Acquisition Complementary, Provides Significant Synergies
Fitch views the pending acquisition of Hillshire as in line with Tyson's strategy of expanding in prepared foods and value-added products and expects the purchase to be accretive to margins. Tyson's prepared foods operating margin was 1.3% for the nine months ended June 28, 2014, excluding a $49 million impairment charge related to the closure of three plants. Results were well below current normalized expectations of 4%-6% as performance has been impacted negatively by higher raw materials and investments in growth platforms. Hillshire's operating margin for the LTM period ended March 29, 2014 was roughly 10%.
Tyson expects more than $225 million of operational, purchasing, and distribution synergies from combining its prepared foods business with Hillshire in fiscal 2015. The firm increased total projected synergies to at least $500 million within three years, up from its original estimate of $300 million. Fitch views the realization of synergies and anticipated margin expansion combined with debt reduction as key rating factors for Tyson. The company plans to provide a new normalized range for prepared foods after the Hillshire transaction closes.
Earnings Remain Strong
Fiscal 2014 will mark the fifth consecutive year of strong operating performance for Tyson. For the nine-months ended June 28, 2014, operating earnings increased 17% versus prior year to $1.1 billion inclusive of $49 million of impairment. Operating income saw a 2.5% rise in consolidated sales volumes, an average price increase of 5.4%, and a $460 million decline in feed costs. Operating margins in chicken, pork, and beef were 8.2%, 7.6%, and 1.7%, respectively.
Tyson expects fiscal 2015 to be another strong year. Feed costs are projected to decline $400 million in 2015, after declining $500 million in fiscal 2014, and overall protein demand is projected to remain robust. Tyson's guidance includes operating margins at or above 10% for chicken and within the 6%-8% normalized range for 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. Tyson began reporting international results separately in the second quarter of fiscal 2014. The segment will consist of chicken operations in China and India following the divestiture of operations in Mexico and Brazil.
Liquidity, Maturities and Debt Terms
Tyson's liquidity at June 28, 2014 consisted of $587 million of cash and availability under a $1 billion unsecured revolver, which Fitch believes was undrawn. Significant upcoming maturities are limited to $638 million of 6.6% senior unsecured notes due April 1, 2016. All of Hillshire's unsecured notes, except the 6.125% notes due 2033, include a change of control triggering event provision. Tyson will not have to redeem Hillshire's outstanding bonds, given that the bond provisions require a downgrade to non-investment grade by all three agencies.
Tyson's revolving facility expires Aug. 9, 2017. The facility is guaranteed by Tyson and its Tyson Fresh Meats (TFM) subsidiary as long as TFM guarantees the $638 million 2016 and $1 billion 2022 senior unsecured notes. Tyson's $120 million 7% notes due 2018 and $18 million 7% notes due 2028 do not benefit from a TFM guarantee. Fitch does not delineate ratings based on these guarantees due to Tyson's strong credit protection measures and low probability of default.
On June 27, 2014, Tyson amended its credit agreement to allow for the acquisition of Hillshire. Changes included, among other things, the elimination of certain limitations related to the incurrence of debt and increasing the maximum debt-to-capitalization from 50% to 65% through the first full quarter following the closing of the Hillshire transaction and 60% thereafter. The previous ratings-based collateral trigger was eliminated and a priority debt basket of 15% of consolidated net tangible assets was added. Fitch estimates that debt-to-capitalization was approximately 21% at June 28, 2014.
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.
However, factors that could lead to a rating upgrade include:
--Realization of $500 million or more of expected synergies;
--100 bps or more of EBITDA margin expansion;
--Annualized FCF averaging around $800 million over time;
--Greater than expected debt reduction and operating income growth such that total debt-to-operating EBITDA is sustainable at around 2x or lower;
--The maintenance of $1 billion or more of liquidity.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Weak top-line growth or significant margin contraction due to prolonged supply or demand imbalances resulting from animal diseases or higher feed cost and substantially lower than expected FCF such that total debt-to-operating EBITDA is sustained above approximately 2.5x;
--Additional material size acquisitions over the near term or aggressive financial policies relating to dividends and share repurchases would be viewed negatively.
Tyson's ratings are as follows:
--Long-term Issuer Default Rating (IDR) 'BBB';
--Unsecured bank facility 'BBB';
--Senior unsecured notes 'BBB';
--Short-term IDR 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology including Short-term Ratings and Parent and Subsidiary Linkage ' (May 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