Tyson Foods Put on CreditWatch Negative

S&P cites lower commodity prices and the uncertainty caused by the discovery of a case of BSE in Canada

On May 21, 2003, Standard & Poor's Ratings Services placed its 'BBB' corporate credit and senior unsecured ratings on leading poultry and beef producer and processor Tyson Foods (TSN ) on CreditWatch with negative implications. At the same time, Tyson's short-term and commercial paper rating was lowered to 'A-3' from 'A-2'. The company's commercial paper rating is not on CreditWatch and Tyson's corporate credit rating will likely remain investment grade following the review.

Springdale, Ark.-based Tyson had total debt of about $3.9 billion as of March 29, 2003.

The CreditWatch listing follows continued weak credit measures for the rating due to a prolonged period of lower commodity pricing, driven by the excess supply of all proteins in the marketplace. In addition, the recently announced case of a single Canadian cow contracting bovine spongiform encephalopathy (BSE) will add an additional level of uncertainty to Tyson's financial performance in the near-term. The case further exacerbates an already depressed protein market in which Tyson competes.

As a result of these factors, Standard & Poor's expects that credit measures will not strengthen in the intermediate term, as was previously anticipated, given the current commodity market conditions.

Tyson is the world's largest marketer and processor of chicken. IBP is the largest marketer of beef and the second largest marketer of pork. Standard & Poor's will monitor the situation closely for additional information and details to evaluate the financial impact of these issues on the company ratings.

Although Standard & Poor's expects Tyson to continue to focus on operating improvements and debt reduction, weak operating performance could delay meaningful balance sheet improvement in the intermediate term following its debt-financed acquisition of IBP Inc. in 2001. Moreover, lower commodity prices and potentially lower sales from Canadian beef operations provide another challenge for the firm.

Financial results have weakened. Rolling 12-month EBITDA interest coverage ended March 29, 2003, was 4.0x, while rolling 12-month total debt to EBITDA was 3.0x. Tyson has repaid about $900 million in debt since the acquisition, and Standard & Poor's expects future discretionary cash flow (after capital spending and dividends) to be used largely for debt reduction. However, improvement in credit measures will likely be slower then expected. Standard & Poor's has not incorporated additional acquisitions or significant share repurchases into the expected ratings.

Liquidity: The company's financial flexibility is adequate given its cash generating ability and a $1.0 billion revolving credit facility (including a $200 million 364-day facility, a $300 million three-year facility, and a $500 million five-year facility). As of March 29, 2003, about $250 million in letters of credit were outstanding. The credit facility backstops Tyson's commercial paper program. As of May 16, 2003, about $218 million was outstanding under the company's commercial paper program.

The company's credit facility and cash flow is more than sufficient to meet near-term maturities, and financial ratios remain well within the financial covenants (which include minimum interest coverage and a maximum leverage ratio).

From Standard & Poor's RatingsDirect

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