New issue from Smithfield Foods should reprice curve
admin | September 11, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Smithfield Foods (SFD, Ba1/BBB-/BBB) recently tapped the market to help fund the tender of its front end debt. The company issued $500 million of a new 10-year which will be coupled with cash on hand to tender for its 2021 and 2022 notes. If the tender is successful, once completed it will leave SFD with nothing maturing until 2027, drastically improving their debt maturity profile. The new deal had initial price talk of +300 bp – just behind where the 2029s where trading – but was met with such demand that the deal was walked in to +245 bp. The aggressive pricing of the new deal should significantly reprice the existing 2027 and 2029 bonds, which have the potential to tighten at least 30 bp based on the current tender levels of the 2021 and 2022 bonds, and the interpolated Consumer Staples curve.
The slope of the existing SFD curve relative to the BBB Consumer Staples curve is highlighted in Exhibit 1.
Exhibit 1. Consumer Staples Curve vs. SFD Curve
SFD announced that it would be tendering for the full $400mm outstanding principal amount of its 2021 and 2022 bonds on 9/8/20. At announcement the company will be tendering for the 2021 issue at $100.625 and the 2022 bonds at $101. We note that the tender offers are well below the make whole call for each bond. The 2021 bonds carry a make whole of +20bps which currently translates to $102.06, while the make whole on the 2022 bonds is +25bps or $103.60. In order to take out all the bonds, SFD may need to raise its tender offers or make whole the bonds that don’t get tendered as we doubt there would be 100% participation at these levels. The tender expires at 5pm NYC time on 9/14/20.
Moody’s Upgrade in the Cards?
Moody’s rated the new issue Ba1 with a stable outlook and noted that they view the debt offering and concurrent tender as a credit positive, given that it extends near term maturities without materially raising interest costs. While the agency believes that SFD will experience higher earnings volatility over the next year due to volatility associated with the pandemic, they expect SFD to maintain very good liquidity throughout. Furthermore, they noted that SFD’s corporate governance policies are above average, underscored by its financial policies that prioritize low leverage (~2x) and strong liquidity. We note that as of 6/28/20, SFD’s leverage was roughly 1.4x and the company had liquidity of over $2.9bn. While leverage is expected to increase in the back half of 2000 due to EBITDA declines, it is expected to remain below 2.0x. Moody’s has noted that an upgrade could occur if leverage is sustained below 2.0x, liquidity is maintained above $1.0bn and overall earnings stabilize.
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