Determined not to squander the years it spent clawing its way out of the junk bond market, Tyson Foods has pandered to bond investors by issuing more equity than first expected to pay for its US$8.2bn acquisition of Hillshire Brands.
On Monday, it placed US$950m of stock and US$1.5bn of mandatory tangible equity units, the latter getting 85% equity treatment from the ratings agencies.
That was more than the US$1bn-$1.5bn of equity some analysts had expected and significantly bolsters Tyson's pitch to investors within the next two weeks, when it could bring a US$3.25bn bond issue to market.
"I'm going to look at this credit now," said Rajeev Sharma, investment-grade corporate bond portfolio manager at First Investors Management Co. "I was anticipating this name to be high yield."
Tyson's ability to avoid the cusp of investment-grade and high yield with a split rating was thrown into question in June, when it began its food fight with Pilgrim's Pride for Hillshire, the king of sport game fast food, with brands such as Ball Park hot dogs and State Fair corn dogs.
Tyson originally bid US$6.8bn to beat Pilgrim's Pride for Hillshire, but was eventually forced to pay US$8.55bn including assumed debt, as well as a US$160m break-up fee that Hillshire incurred for ending a planned merger with Pinnacle Foods.
As smart as the acquisition was from a strategic perspective, it was alarming to see a company that had worked tirelessly to go from Double B in 2008 to Triple B in 2012 by all agencies to suddenly catapult its leverage from around 1x into the low 3s.
Both S&P and Moody's put their BBB and Baa3 ratings on credit watch for downgrade. And Tyson, having suffered from the vagaries of an inherently unpredictable industry, has had to do more than keep one notch above junk.
"They could have raised less equity and stayed investment-grade, but the company prefers a Triple B flat rating," said Taylor. "They don't want to ride the cusp between investment-grade and non-investment-grade, which is what a Triple B minus rating is." PRIORITIZING DEBT
Tyson has vowed to favour debt repayments over share buybacks and is kickstarting its deleveraging plans by earmarking US$575m of proceeds from Monday's sale of JBS in Latin America to pay down debt.
"We expect total debt to Ebitda to decline to between 2.0x and 2.5x within two years of the transaction closing," said Taylor, from pro forma leverage of about 3.2x.
The US$8.2bn of committed financing from Morgan Stanley and JP Morgan will be paid for with US$314m of cash, US$950m of common stock, US$1.5bn of TEUs, US$2.2bn of term loans, and US$3.25bn of bonds.
The US$2.2bn term loan is split between a US$1.1bn three-year facility, a US$500m five-year tranche A, and a US$600m five-year tranche B, and the US$3.25bn bonds are expected to be issued in five-, 10- and 30-year maturities, with a weighted average interest rate of around 3.9%.
The equity issue prompted S&P to remove Tyson's ratings from negative CreditWatch on Thursday and join Fitch in affirming the credit's BBB ratings.
Moody's, now the outlier with a negative watch on Tyson's Baa3 rating, is expected to issue an announcement before the bond deal comes to market.
Being on the edge of junk is especially problematic for a large acquisition financing that companies need to spread across the curve to avoid a bunching of redemption towers.
"You especially have to believe things will go well, because if they do drop back into high-yield, there will be no bid for 30-year bonds in the high-yield market," said a senior syndicate manager away from the bond issue.
Staying away from the risk of tipping into the Double B category can save a company 100bp or more in cost.
Tyson is aiming for a 3.91% average weighted interest rate on its bonds, according to Fitch. Its most recent issue was a 10-year in 2012, which was quoted in the past week at a dollar price of 106.25, 116bp over Treasuries and a G-spread of 140bp.
Assuming a credit curve of about 25bp to go from 2022 to a 2024 maturity and then deducting around 5bp for the high dollar price, fair value for a new 10-year note would be around 160bp, according to one investor.
"That sounds about right for fair value, but I could see it going a bit better than that," said a head of bond syndicate in New York. "There are not many Triple Bs trading north of the 150bp level. We had [BBB- rated gas company] EQM come to market this week in 10-years at Treasuries plus 160bp and split-rated Martin Marietta Materials' June issue of a 10-year at 170bp that is at 165bp. So even with a bias on protein, Treasuries plus 160bp seems very cheap."
The fives/10s credit curve is thought to be around 35bp-40bp for the consumer cyclical sector and some bankers think Tyson would need to pay about 25bp-37.5bp more than its 10-year for a 30-year tranche, depending on its size.
With all its filings in place, Tyson can sit and wait for the right market environment to issue. Expectations are that the acquisition will close in late September this year.
