Capital Markets

Tyson Reduced to Junk

Commodity cost hikes prompt S&P to bump the meat company's rating down to BB.
Stephen TaubSeptember 5, 2008

Standard & Poor’s has lowered its credit rating for Tyson Foods to junk status — pushing it down two notches, to BB from BBB- — on concerns over the company’s rising commodity costs.

S&P also placed Tyson’s senior unsecured rating on CreditWatch with negative implications.

The rating agency noted that Tyson may face even higher near-term commodity costs than its previous expectations, due to heavy rains and flooding in the Midwest that damaged crops.

S&P’s move came hours after Tyson, the world’s largest processor and marketer of chicken, beef, and pork, announced plans to raise money in the capital markets. Tyson said it intends to offer 20 million shares of stock. It added that Don Tyson, the company’s former chairman and a current director, intends to purchase 3 million shares in the offering.

Tyson also plans to offer $450 million of convertible senior notes due in 2013.

The common stock offering and the convertible notes offering are being conducted as separate public offerings and are not contingent upon each other, the company stressed. Tyson said it plans to use the proceeds from the offerings to repay portions of the outstanding borrowings under its accounts receivable credit facility and for other general corporate purposes such as acquisitions, strategic investments, and growth initiatives.

To reduce potential dilution from the conversion of the notes, Tyson said it expects to use some of the proceeds from that offering to fund convertible note hedge and warrant transactions with affiliates of the notes’ underwriters. These counterparties expect to enter into various derivative transactions involving Tyson’s common stock at about the same time the notes are priced, the company pointed out.

“The ratings remain on CreditWatch with negative implications, pending the company’s completed planned debt and equity offerings,” said S&P credit analyst Patrick Jeffrey. Once they are completed, S&P said it probably will affirm all of the company’s ratings at these revised levels. “If Tyson Foods does not complete these transactions in a timely fashion, we would review the ratings and could consider a downgrade if market conditions weaken further,” added Jeffrey.

Investors were clearly not happy with the company’s financing plan and S&P’s downgrade: on Thursday Tyson’s stock plunged 8.5 percent on the news.