Fitch Ratings has assigned a 'BBB' rating to Pilgrim's Pride Corporation's (PPC) new secured credit facilities totaling USD1.5 billion, composed of a USD800 million revolving credit facility and USD700 million in term loans due in 2026.
The new facilities include PPC's wholly-owned subsidiaries, To-Ricos, Ltd and To-Ricos Distribution, Ltd, registered in Bermuda as co-borrowers and guarantors. The new facilities are secured by a first lien on accounts receivables, inventories, and substantially all of the company's non-Mexican and non-European assets.
KEY RATING DRIVERS
New Secured Loan: The new secured credit facilities will provide liquidity for general corporate purposes, including the acquisition of the Kerry Consumer Foods' Meats and Meals business (Kerry acquisition) and refinance the outstanding amount under the USD1.25 billion (USD750m revolver and USD500 million term loan) due in 2023. The total outstanding amount under the existing credit facilities was USD41 million for the revolver and USD438 million under the term loan at the end of the second quarter 2021. Total secured leverage/EBITDA was 0.4x as of 2Q21.
Parent Linkage: Fitch assesses PPC's linkage with JBS as moderate. PPC is a strategic asset of JBS due to its overall profit contribution to the group, growth prospects and diversification. JBS owns 80% of PPC and influences its business and financial strategies. Fitch estimates PPC will represent about 23% of JBS USA's consolidated EBITDA in 2021.The linkage is tempered by the presence of minority shareholders at PPC, which are represented by independent board members governed by U.S. law due to its listing on Nasdaq. There are also limited legal ties, such as cross-default or acceleration debt covenants, and no upstream guarantees exist between PPC and JBS.
Increasing Leverage: Fitch forecasts PPC's net debt/EBITDA to be around 2.9x by YE 2021 (from 2.2x at YE 2020) due to acquisitions. Fitch expects PPC to generate close to $1 billion of EBITDA, up from $787 million in 2020, based on higher prices in both the U.S. and Mexico and stronger consumer demand. Fitch expects the company's performance to benefit from the gradual economic recovery, less pandemic-related disruption, and better performance in the foodservice segment despite ongoing challenges from higher feed costs. EBITDA was $371.6 million in 2Q21 or a 10.2% margin, 231.2% higher than a year ago due to higher chicken prices and the strong performance of its Mexican operations.
Resilient Business Profile: PPC's ratings are supported by its resilient business profile as one of the world's largest chicken processors, with a presence in the U.S., Europe and Mexico; its diversified product portfolio; and its vertically integrated operations. Products include fresh and prepared chicken products, and value-added export chicken products. Fresh chicken sales accounted for 86%, 47% and 95% of total U.S., U.K. and Europe, and Mexico sales in 2020, respectively. U.K. and Europe pork sales represented about 11% of total sales, while prepared foods represented about 17%. Approximately half of PPC's sales go to food retailers, while the other half goes to the foodservice segment, predominately quick-service restaurants. U.S. sales represented about 62% of group sales as of YE 2020.
Acquisition Appetite: The ratings are tempered by PPC's record of debt-financed acquisitions, as the company has recently announced the acquisition Kerry Consumer Foods' Meats and Meals business for $952 million, funded through mix of cash, FCF and existing credit facilities. This announced acquisition increases the portion of PPC's portfolio derived from higher margin prepared food products sold through the retail channel to over 25%. Fitch expects the company to continue to pursue acquisitions that will increase more value-added products to its portfolio. The company acquired Tulip Limited in 2019, Moy Park in 2017, and Tyson Foods, Inc.'s Mexican operations in 2015.
Protein Outlook: The U.S. Department of Agriculture expects U.S. chicken production to be broadly stable in 2021 and for demand from exports to remain robust. Fitch expects the sector to benefit from the gradual economic recovery and the reopening of outdoor dining activities. Among significant industry risks are downturns in the economy or consumer demand, imposition of increased tariffs, sanitary risks, and higher labor and feed costs.
DERIVATION SUMMARY
PPC's business profile is in line with its 'BBB-' IDR, incorporating the implicit support of its parent, and due to its size, profitability, and geographical diversification. The company operates in the U.S., Mexico and Europe (Moy Park,Tulip), with PPC's U.S. operations representing about 62% of sales as of fiscal YE 2020.
PPC is smaller than other U.S. peers, such as Tyson Foods, Inc. (BBB/Stable) and Cargill Incorporated (A/Stable), which receive synergistic benefits from their scale. PPC has a less diversified product portfolio than parent company JBS or Tyson Foods, which exposes the company to higher industry risks.
In July 2021, PPC settled with the End-User Consumer Indirect Purchase Plaintiff Class and the Commercial and Institutional Indirect Purchaser Plaintiff Class for an aggregate amount of $120.5 million. PPC also settled with the direct purchaser's lawsuit class action for $75 million in early 2021. The company recognized $251.4 million of expense in 1H21 to cover settlements entered into, and additional potential settlements, with parties that have opted out of such class settlements.
No Country Ceiling or operating environment aspects affect the rating. Fitch's parent-subsidiary linkage criteria are applicable due to the shareholder ownership.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
EBITDA close to US$1 billion in 2021;
Capex of about US$350 million in 2021;
Total net debt/EBITDA below 3x in 2021.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of JBS's ratings could lead to an upgrade for PPC.
Strong FCF.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Significant debt-financed acquisitions and/or excessive shareholder distributions;
A one-notch downgrade of JBS would likely trigger a downgrade of PPC.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Fitch views PPC's liquidity as adequate and supported by cash on hand, revolver availability, strong cash flow generation, and a comfortable amortization profile. PPC had approximately $392 million of cash and $25 million of short-term debt as of June 27, 2021. The company issued a 4.25% sustainability-linked senior unsecured bond due in 2031 in April 2021 and repurchased its outstanding 5.750% senior notes due in 2025.
ISSUER PROFILE
PPC is one of the largest chicken producers in the world, with operations in the U.S., the U.K., Mexico, France, Puerto Rico and the Netherlands. PPC is a vertically integrated company controlled by Brazil-based JBS S.A. through an indirect ownership of common stocks.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONSENTITY/DEBT RATING
Pilgrim's Pride Corporation
senior secured
LT BBB New Rating
To-Ricos, Ltd.
senior secured
LT BBB New Rating
To-Ricos Distribution, Ltd.
senior secured
LT BBB New Rating
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
PILGRIM'S PRIDE CORPORATION 
