Oct. 19, 2009 (Business Wire) -- Fitch Ratings has assigned an initial Issuer Default Rating (IDR) of 'B-' to Smithfield Foods, Inc. (Smithfield). Fitch rates Smithfield's debt as follows:

--Long-term IDR 'B-';

--Secured asset-based revolver (ABL) at 'BB-/RR1';

--Secured term loan at 'BB-/RR1';

--Secured notes at 'BB-/RR1';

--Senior unsecured debt at 'CCC/RR5'.

The Rating Outlook is Stable.

At Aug. 2, 2009, Smithfield had approximately $3.4 billion of total debt. Total debt, pro forma for the issuance of an additional $225 million of 10% secured notes on Aug. 14, 2009 and subsequent repayment of $321 million in borrowings on its Euro credit facility being terminated, is $3.3 billion. Approximately $1.1 billion or 33% of this debt is secured while $2.2 billion or 67% is unsecured.

Rating Rationale:

The ratings incorporate Smithfield's high financial leverage, low margins, volatile cash flow generation and the current unprecedented losses in hog production. Fitch believes the lack of meaningful diversity across proteins reduces Smithfield's ability to offset volatility in hog production and subjects the company to outsized swings in operating earnings and leverage statistics, given its cyclicality. These negatives are partially mitigated by the fact that Smithfield is currently generating positive free cash flow (FCF) (defined as cash flow from operations less capital expenditures and dividends) and that near-term maturities are manageable. FCF has been supported by significant improvements in working capital, due to lower cost grain, live hog inventory and margin requirements on hedges during the first quarter ended Aug. 2, 2009, and significantly less capital expenditures. Smithfield is foregoing facility upgrades and packaged meats expansion in the near term.

The ratings recognize that consolidated operating income will remain under pressure and financial leverage will remain high until the current oversupply of hogs in the industry is corrected and Smithfield's hog production segment returns to profitability. The hog production industry, which has been unprofitable since October 2007, is experiencing record losses. As a result, Smithfield and the rest of the industry began reducing hog supplies with sow herd reductions at the end of 2008 and inventory liquidations are now starting to increase.

Fitch expects continued rationalization of supply and relatively stable feed costs to improve industry profitability. Smithfield's ratings reflect Fitch's belief that the company's hog production segment can break even within the next 12 months, absent additional losses on commodity grain hedges and any unforeseen shocks to pork demand. The ratings incorporate potential margin pressure in Smithfield's pork segment due to the negative effect that increased slaughter rates could have on retail selling prices. However, savings from the company's pork restructuring program should offset some of this pressure. The company expects to realize $125 million of annualized pork segment restructuring savings by the fiscal year ended April 2011.

The 'RR1' rating on Smithfield's secured debt indicates that Fitch views recovery prospects on this debt as outstanding at 91% - 100%. Collateral on secured debt includes liens on eligible accounts receivable and inventories, as defined by Smithfield's ABL revolver and $2.4 billion of net property, plant & equipment at Aug. 2, 2009. The 'RR5' rating assigned to Smithfield's senior unsecured notes reflects Fitch's opinion that recovery prospects would be below average or 11%-30% if the bonds went into default.

Rating Drivers:

The Stable Outlook reflects reduced losses in hog production, Fitch's belief that Smithfield's consolidated EBITDA margins can approximate 5% in a normal operating environment and that the company can reduce leverage to below 5.0 times (x) within two years.