Tyson Foods secures more than $2 billion in new debt to help finance AdvancePierre deal

Tyson Foods recently entered into a new loan agreement with Morgan Stanley acting as lead lender that will provide $1.8 billion to help fund the $4.2 billion pending acquisition of AdvancePierre Foods.

The loan agreement is dated May 12 and involves JP Morgan Chase and Merrill Lynch. Cooperatieve Rabobank is the joint bookrunner for the loan and JPMorgan Chase and Bank of America along with Rabobank are the syndication agents, according to the 8K filed Wednesday (May 17) by Tyson Foods with the U.S. Securities and Exchange Commission.

The borrowings under the new loan agreement will be unsecured debt by Tyson Foods with a three-year maturity. Interest charged on the debt ranges from prime rate by Morgan Stanley to the federal funds rate plus 0.5% and the rate based on offerings for U.S. dollar deposits in the London interbank market plus 1% annually by the other lenders. In each case there is an additional spread which is based on the credit ratings by Moody’s and S&P. The lenders will also get an annual fee of 0.15% of the daily average of the undrawn commitment, which is paid quarterly in arrears.

Tyson agreed to several debt covenants in connection with the new line of credit. The covenant terms limit the ratio of Tyson’s debt to capitalization to a maximum of 0.60 to 1 and requires the ratio of Tyson’s consolidated EBITDA to interest to be at least 3.75 to 1.

Another $250 million in credit was recently secured as Tyson also amended and restated an existing loan agreement with Morgan Stanley increasing the credit from $1.25 billion to $1.5 billion and extending the maturity date to May 12, 2022. This extended line of credit has similar debt covenants and interest charges as the $1.8 billion.

Tyson Foods CFO Dennis Leatherby has repeatedly said the company will work to keep its investment grade credit rating despite being in acquisition mode.

Moody’s recently affirmed Tyson’s credit ratings above investment grade following the $4.6 billion it is spending to acquire AdvancePierre. Moody’s said the proposed mostly debt-financed acquisition has positive and negative credit elements. The Baa2 rating on Tyson Food’s long term debt is deemed to be medium-grade and subject to moderate credit risk, according to Moody’s. The short-term rating of Prime 2 demonstrates the debtor’s strong ability to repay short-term debt obligations. Moody’s also gave Tyson an outlook rating of “stable.”

Moody’s said Tyson’s increase in financial leverage could result from the acquisition. There is also the potential for integration or operating disruptions at AdvancePierre that cause the financial leverage to remain high over the next year. Moody’s said the risks are balanced against significant merits of the transaction, including an estimated $200 million of cost synergies Tyson could achieve by 2020.

Moody’s said Tyson has decided to curtail its stock buybacks until late 2019 to focus on deleveraging from this deal. The rating service said debt will be approximately 2.8 times gross earnings (EBITDA) compared to 1.8 times now. Moody’s said 2.5 times would be tolerable to maintain the Baa2 rating. Moody’s maintained that rating expecting cost synergies and assets sales of brands like Sara Lee to bring leverage levels down to 2.5 times by September.

Tyson’s move to buy AdvancePierre has hit a legal obstacle. A proposed class action suit was filed May 12, in the U.S. District Court for the Southern District of Ohio seeking to block the deal. Lead plaintiff is shareholder Stephen Bushansky who filed on behalf of others similarly situated. The plaintiff claims not all shareholders will benefit equally in this deal.

The suit notes the proposed acquisition by Tyson “is the result of a truncated single-bidder process designed to benefit AdvancePierre’s management and largest stockholder, the Oaktree Holders. Despite having garnered interest from more than 30 parties in an outreach AdvancePierre conducted in 2015 prior to its IPO, “the Board failed to conduct even a limited market check before agreeing to the proposed (Tyson) deal.”