Fitch Assigns Initial 'B-' IDR to Smithfield; Outlook Stable

--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.

However, Smithfield's credit statistics are likely to remain strained in fiscal 2010 due to the potential for continued losses, albeit less severe, in hog production. Although the industry continues to reduce live hog inventory, Fitch remains concerned about on-going export demand weakness. According to the USDA, U.S. pork export volume is down 19% year-to-date through August 2009, off record 2008 levels; with much of the decline being attributed to fears associated with H1N1 aka 'Swine Flu'. Fitch's ratings and Outlook consider export risk but, as mentioned earlier, incorporate expectations that Smithfield's hog production segment will break even in fiscal 2011.

While Smithfield has a long history of debt-financed acquisitions, Fitch expects maintaining sufficient liquidity and debt reduction to take priority over acquisitions and share repurchases in the near term. Fitch anticipates that debt reduction will be driven more by FCF generation and less by asset sales. While not anticipated, Smithfield does have the ability to divest of equity investments; including its 37% ownership in public traded Camprofrio Food Group, valued at $627 million at Aug. 2, 2009.

Hog Production Operating Performance and Credit Statistics:

Smithfield's hog production segment has generated operating losses for seven consecutive quarters. Operating losses in the segment totaled $128 million, excluding $34 million of impairment charges, in the first quarter of fiscal 2010 ended Aug. 2, 2009 and $521 million in the year ended May 3, 2009. These losses have only been partially offset by operating income growth in the company's pork processing segment, Smithfield's largest segment representing 83% of fiscal 2009 net sales. During the first quarter of fiscal 2010, this segment's operating income grew 74% to $107 million, excluding $6.3 million of restructuring charges, due primarily to improved profitability in packaged meats, which represents more than half of segment sales. During the fiscal 2009 year, operating income grew 6% to $483 million, excluding $88.2 million of restructuring charges.

Hog production losses have occurred because the market price of live hogs has not covered Smithfield's hog production costs. The severity of the situation has been magnified by losses on commodity hedging contracts. Given the unprecedented run up in corn prices during calendar 2008, Smithfield hedged its exposure by locking in corn at prices above $6 per bushel. Since the beginning of fiscal 2009 through the first quarter of fiscal 2010 ending Aug. 2, 2009, net hedging losses, across all hedges, recognized in earnings totaled approximately $100 million. Furthermore, margin requirements reduced cash flow from operations by a net of approximately $50 million during the same time period. Roughly $25 million of deferred net hedging losses in Accumulated Other Comprehensive Income at Aug. 2, 2009 are expected to be reclassified into earnings in the current second quarter of fiscal 2010 ending October 2009. Grain hedges are not expected to be a risk to earnings in the second half of fiscal 2010. While overall losses will be less severe, Fitch still expects the hog production segment to lose money in fiscal 2010, given weak live hog prices.

As a result of losses in hog production, Smithfield's credit metrics have deteriorated significantly. For the latest 12 month (LTM) period ending Aug. 2, 2009, total adjusted debt-to-operating EBITDA was 33.6x, versus an average of 4.0x over the 1999-2008 period. Operating EBITDA-to-gross interest expense was 0.4x and FFO fixed charge coverage was 1.4x. While credit metrics are extremely weak for the rating category, Fitch believes considerable improvement is achievable by fiscal 2011. As mentioned earlier, Fitch estimates that total debt-to-operating EBITDA can fall below 5.0x and operating EBITDA-to-gross interest expense can exceed 2.0x. Fitch's projections conservatively assume Smithfield's hog production segment breaks even in 2011 and pork segment margins remain flat, despite likely benefits from restructuring.

Liquidity and Upcoming Maturities:

Smithfield generated $322 million of FCF during the LTM period ended Aug. 2, 2009, a considerable improvement over levels generated in recent years. As previously mentioned, the increase has been driven by improvements in working capital and lower capital expenditures. Fitch conservatively projects that Smithfield can generate about $200 million of FCF during fiscal 2010, following the $130 million generated in fiscal 2009.

At Aug. 2, 2009, total liquidity of $1.2 billion consisted of approximately $500 million of cash and $700 million of revolver availability. Fitch estimates cash levels of approximately $700 million following the issuance of the additional $225 million of 10% secured notes, the receipt of approximately $300 million in net proceeds from the issuance of common stock and the subsequent payoff of $321 million of Euro credit facility borrowings. Current pro forma liquidity is estimated at around $1.4 billion.

Significant upcoming maturities include $600 million of 7% unsecured notes due on Aug. 1, 2011 of fiscal 2012. Smithfield's $1 billion ABL revolver matures July 2, 2012 but is subject to an earlier maturity date of May 3, 2011 if more than $60 million of the $600 million 7% noted are outstanding. Fitch anticipates that Smithfield will refinance or use FCF and cash balances to payoff the $600 million notes during fiscal 2011.

Covenants:

Covenant risk is minimal for Smithfield. Smithfield's ABL credit facility subjects the company to a springing fixed charge coverage financial covenant. If availability falls below 15% of the total commitment, the company must maintain a fixed charge coverage ratio of 1.1x. Fitch does not expect revolver availability to fall below this level, given the company's substantial cash balance and positive FCF. Smithfield's bond indentures limit the company's ability to incur incremental debt if interest coverage falls below 2.0x. At Aug. 2, 2009, Smithfield did not satisfy this incurrence-based test. Fitch does not expect interest coverage to exceed 2.0x until fiscal 2011.

Smithfield Foods, Inc. is the largest hog producer and pork processor in the world. In the fiscal year ended May 3, 2009, Smithfield generated $12.5 billion of net sales and $193 million of operating EBITDA, excluding $88.2 million of non-recurring charges. The company's four operating segments and their contribution to 2009 net sales were: Pork (83%), International (11%), Hog Production (4%) and Other (2%). The Other segment includes Smithfield's 49% ownership interest in Butterball, LLC., 37% interest in Camprofrio Food Group and 50% ownership in Mexican joint ventures. Approximately 89% of Smithfield's revenue was generated in the United States and 11% was from international markets. The company distributes 75% of its product via the retail channel and 25% through the foodservice outlets.

Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process other than through the medium of its public disclosure.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

SOURCE: Fitch Ratings

Fitch Ratings, Chicago 
Carla Norfleet Taylor, CFA, +1-312-368-3195 
Christopher M. Collins, +1-312-368-3196 
Wesley E. Moultrie II, CPA, +1-312-368-3186 
Media Relations, New York 
Cindy Stoller, +1-212-908-0526 
cindy.stoller@fitchratings.com