New Coverage/Issuer Covenant Card: Pilgrim’s Pride Corp.

Relevant Items:
Pilgrim’s Pride Debt Documents
Pilgrim’s Pride Covenants Tear Sheet, Debt Document Summary

The below article includes new analysis of Pilgrim's Pride Corp. as well as an issuer covenant card from the Covenants by Reorg team. Request a trial to access the accompanying tear sheet. 

Pilgrim’s Pride is a food company and producer, processor and marketer of chicken and pork products to retailers. The company sells primarily to the foodservice industry including chain restaurants such as Chick-fil-A and McDonald’s and retail customers including grocery store chains and wholesale clubs such as Kroger, Costco and Publix. As of March 29, 2020, 78.8% of the company’s outstanding common stock was beneficially owned by JBS SA, a Brazilian company that is one of the largest meat producers in the world. Continue reading for the Covenants by Reorg team's analysis of the company's debt documents.

The company has a $500 million term loan and $750 million revolver, which are governed by the same credit agreement and secured by substantially all assets of the company and its subsidiary guarantors, subject to typical exceptions. The borrowers under the bank debt include Pilgrim’s Pride Corp. and certain Bermuda subsidiaries thereof. The company also has $1.85 billion outstanding across two series of unsecured notes

In its 10-Q filed April 29, the company disclosed that all 60 of its production facilities (except for three facilities in Europe) were operating as of April 10 despite the Covid-19 pandemic, though at reduced production levels for certain facilities “as a consequence of the decline in demand by restaurants and other foodservice businesses.” On June 8, the company disclosed that its CEO, Jayson Penn, had been indicted by a Colorado grand jury in connection with alleged price fixing.

The company’s capital structure and leverage metrics as of March 29 are shown below.

 

 

• Guarantors - The credit agreement provides that certain of the U.S. loan parties (other than Pilgrim’s Pride Corporation) guarantee the Bermuda loan obligations, but the Bermuda loan parties do not likewise guarantee the U.S. obligations or any other debt. The notes are guaranteed by Pilgrim’s Pride Corp. of West Virginia Inc, Gold’n Plump Poultry LLC, Gold’n Plump Farms LLC, and JFC LLC. Notably, if the Bermuda loan parties were to guarantee any debt obligations of Pilgrim’s Pride Corp. or any of the subsidiary guarantors under the notes, the Bermuda loan parties would also be required to guarantee the notes pursuant to the notes’ future guarantors requirements.


• Liquidity and financial covenants - The credit agreement requires the company to maintain consolidated tangible net worth (calculated as shareholders’ equity plus the outstanding principal amount of any permitted subordinated indebtedness minus intangible assets) of at least $150 million plus 50% consolidated net income calculated on a cumulative basis commencing with fiscal year ended 2019. As of March 29, we estimate the company had approximately $551 million of cushion under the tangible net worth test (based on estimated tangible net worth and minimum threshold of $962 million and $412 million, respectively).The company had approximately $896 million of liquidity as of March 29, comprising $536 million of cash and equivalents and $360 million of revolver availability. The revolver is secured pari with the term loan but becomes subject to an ABL-style borrowing base while usage exceeds 65% (plus a 30-day tail period). Revolver usage as of March 29 was around 52%, which permits the company to draw approximately $98 million against the revolver without triggering the borrowing base.


• Negative Covenant Capacities - Although the company’s notes provide it with significant flexibility to incur debt and liens and to make restricted payments and investments, that flexibility will be limited by the more restrictive covenants under the company’s credit agreement.
  
  
  
  • Debt and Liens - In addition to the $360 million available under the revolver, the company can incur $1.25 billion of secured debt, including $1.2 billion of first lien incremental debt and $50 million of general debt secured by noncollateral assets. The company and its restricted subsidiaries can also incur $1.3 billion of additional general-purpose debt; although such debt cannot be secured if incurred by the company, to the extent it is incurred by non-guarantor foreign restricted subsidiaries, it can be secured by their assets.
  
  
  • Dividends and transfers to unrestricted subsidiaries - The company is currently permitted to make unlimited restricted payments subject to pro forma compliance with the tangible net worth covenant ($551mm of cushion as of March 29) and general investments up to 10% tangible net worth ($96 million as of March 29). Because the notes permit unlimited investments within the restricted group, including in nonguarantor restricted subsidiaries (which is typical) and because the credit agreement permits unlimited investments among the loan parties, including investments by U.S.-based loan parties in certain Bermuda-based loan parties, the company is likely currently permitted to make unlimited investments in the Bermuda loan parties that do not guarantee, and have not pledged their assets to secure, the U.S. obligations.
  
  
  • Open Market Purchases of the Notes - The credit agreement’s prepayment covenant restricts the company from prepaying any unsecured debt in excess of $25 million, other than regularly scheduled principal and interest payments. Because the covenant’s only exceptions allow for prepayments using the proceeds of refinancing debt or from equity issuances, the company’s ability to purchase the notes in the open market is extremely limited.
  
  
  
  

• Asset sales - The company is currently required to use asset sale proceeds in excess of $25 million per fiscal year to prepay the term loans or to reinvest in the business.

--Julian Bulaon