Stable outlook gets Smithfield ratings upgrade

by Meat&Poultry Staff
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CHICAGO – Fitch Ratings upgraded the Long-term Issuer Default Rating (IDR) and the senior unsecured debt rating for Smithfield Foods Inc. The company's IDR was upgraded to 'BB-' from 'B+'. Smithfield's senior unsecured debt went to 'BB-' from 'B/RR5'.

Fitch took the rating action because of Smithfield's stable outlook. The company's debt reduction and consistently better-than-expected operating performance and credit statistics contributed to the ratings upgrade. Smithfield paid off roughly $1 billion of debt since fiscal year ended May 2, 2012.

Fitch attributed the upgrade of Smithfield's unsecured debt to the company's deleveraging, and the rating firm's belief that the low amount of secured debt improves recovery for unsecured bondholders in the event of default. About 35 percent of Smithfield's debt was secured while 65 percent was unsecured as of Oct. 30, 2011.

Smithfield's ratings take into account the negative impact volatile grain and potentially lower pork and live hog prices can have on the company's earnings and operating cash flow, Fitch said. Also, Smithfield's lack of diversification across proteins increases business risk, according to the ratings agency.

Partially offsetting the risks is Smithfield's growing portfolio of branded value-added packaged meat products.

"For the fiscal year ended May 1, 2011, Smithfield had $5.7 billion of packaged meats sales which represented 47 percent of its total $12.2 billion of annual revenue," Fitch said. "The largest of the firm's core brands include Farmland and Smithfield, each with over $1 billion of sales. Other large brands include Eckrich, Armour, John Morrell, and Cook's."

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