Tyson Foods 2006 Annual Report Download - page 18

On July 24, 2006, Moody’s Investors Services, Inc. (Moody’s) down-
graded the Company’s credit rating applicable to the 2016 Notes
from “Baa3” to “Ba1.” This downgrade increased the interest rate
on the 2016 Notes from 6.60% to 6.85%, effective on the first day
of the interest period during which the rating change required an
adjustment to the interest rate (i.e., the issuance of the 2016 Notes).
Accordingly, in the fourth quarter, the Company recorded an addi-
tional $0.7 million for the interest period from March 22, 2006, to
July 1, 2006. This downgrade will increase annual interest expense
and related fees by approximately $5 million, including $2.5 million
related to the 2016 Notes.
On July 31, 2006, Standard & Poor’s (S&P) also downgraded the
Company’s credit rating applicable to the 2016 Notes from “BBB”
to “BBB–.” This downgrade did not result in an increase in the
interest rate on the 2016 Notes, nor did it result in an increase
in interest expense or related fees for other debt.
On September 18, 2006, Tyson Fresh Meats, Inc. (TFM), a wholly-
owned subsidiary of the Company, guaranteed the 2016 Notes. This
guarantee does not extend to the other unsecured senior notes of
the Company. Moody’s and S&P did not change the July 2006 credit
ratings applicable to the 2016 Notes. However, Moody’s issued a
new credit rating of “Ba2,” and S&P issued a new credit rating of “BB+”
related to the other unsecured senior notes not guaranteed by TFM.
These new ratings did not impact the interest rate applicable to the
2016 Notes. However, other interest expense and related fees for
other debt increased by less than $3 million.
It is possible one or both of the debt rating agencies may further
downgrade the Company’s bond rating applicable to the 2016 Notes.
S&P currently rates this long-term debt “BBB–,” with a negative out-
look. Moody’s currently rates this debt “Ba1,” with a negative outlook.
The pretax impact to earnings of each further downgrade would
be approximately $5 million annually, per rating agency, of which
$2.5 million would be related to increased interest expense on
the 2016 Notes.
Total debt at September 30, 2006, was approximately $4.0 billion,
an increase of $984 million from October 1, 2005. However, when
adjusted for the $750 million of proceeds on deposit, debt would
have been $3.2 billion, an increase of $234 million from October 1,
2005. Additionally, the Company has an unsecured revolving credit
facility totaling $1.0 billion that supports the Company’s short-term
funding needs and letters of credit. The $1.0 billion facility expires
in September 2010. This agreement was amended on July 27, 2006,
which reduced the availability of the unsecured revolving credit
facility. See below for further description. Also, at September 30, 2006,
the Company had a receivables purchase agreement with three
co-purchasers to sell up to $750 million of trade receivables. These
agreements were restructured and extended in the fourth quarter
of fiscal 2006 and now consist of $375 million expiring August 2007
and $375 million expiring in August 2009. At September 30, 2006,
there was $79.5 million outstanding on each of the commitments.
At October 1, 2005, there were no amounts drawn under the receiv-
ables purchase agreement. Outstanding debt at September 30,
2006, consisted of $3.4 billion of debt securities, a $345 million
term loan and other indebtedness of $246 million.
Total Capitalization
in millions 2006 2005 2004
Debt$3,979 $2,995 $3,362
Equity 4,440 4,671 4,292
The revolving credit facility, senior notes, notes, term loan and
accounts receivable securitization contain various covenants, the
more restrictive of which contain a maximum allowed leverage
ratio and a minimum required interest coverage ratio.
On July 27, 2006, the Company entered into a third amendment
to its five-year credit revolving facility and the three-year term
loan facility of its subsidiary, Lakeside Farms Industries, Ltd. These
amendments modified the minimum required interest coverage
ratio, temporarily suspended the maximum allowed leverage ratios
and implemented temporary minimum consolidated EBITDA require-
ments. The Company was in compliance with all of such covenants
at fiscal year end.
In connection with these amendments, the Company’s availability
under its unsecured revolving credit facility decreased, and if the
Company’s credit rating is further downgraded, prior to the delivery
of the second quarter fiscal 2007 compliance certificate, the Company
is required to have certain subsidiaries guarantee the revolving credit
facility and term loan. The amended agreement allows for maximum
availability under the revolving credit facility of 50% of inventory,
reduced by letters of credit issued and amounts outstanding under
its term loan. The amount available as of September 30, 2006, was
$481 million.
The Company’s foreseeable cash needs for operations and capital
expenditures are expected to be met primarily through cash flows
provided by operating activities. Additionally, at September 30, 2006,
the Company had unused borrowing capacity of $1.1 billion, consist-
ing of $481 million available under its $1.0 billion unsecured revolving
credit agreement and $591 million under its accounts receivable
securitization. At September 30, 2006, the Company had con-
struction projects in progress that will require approximately
$182 million to complete. Capital spending for fiscal 2007 is
expected to be approximately $400 million.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements
material to its financial position or results of operations. The off-
balance sheet arrangements the Company has are guarantees of
16 Ty s on Foods, Inc. 2006 Annual Report
Management’s Discussion and Analysiscontinued