New York - Standard & Poor's assigned its single-'B'-minus rating to Heartland Pork Enterprises Inc.'s $110 million senior unsecured notes due 2005. In addition, Standard & Poor's assigned its single-'B' bank loan rating to the company's $59.5 million credit facility due 2001. A single-'B' corporate credit also was assigned.
The outlook is negative.
The corporate credit rating reflects Iowa-based Heartland's considerable financial risk, stemming from its large debt burden, its involvement in an ag-related commodity-oriented industry, a highly concentrated customer base, and its short track record.
Heartland is a large hog producer benefiting from favorable feed costs and a current imbalance of supply and demand for hogs for processing in Iowa. The company, founded in 1994, recently has been negatively affected by weak hog prices and start-up costs. Moreover, the firm is subject to the volatility associated with an agricultural commodity product. Margins should continue to be constrained as hog prices are expected to remain below historical levels over the near-term. However, the company is currently constructing a new feed facility, which should result in significant savings going forward and could limit margin pressure.
Currently, Heartland has only two customers for its high-quality hogs: Cargill Inc. (AA-/Negative/A-1+) and IBP Inc. The contracts expire April 30, 2000 and Dec. 31, 2001, respectively. The terms of the contracts reduce the commodity price risk and ensure demand. Nevertheless, the dependence upon these limited contracts is a significant rating concern.
Financially, the company is highly leveraged with pro forma total debt to earnings before interest, taxes, depreciation, and amortization approaching 10 times. However, this ratio could significantly improve if the anticipated savings from the feed mill is achieved. EBITDA coverage of interest is will remain weak at under 2x over the next 12 months. However, financial flexibility will be derived from a $50 million revolving credit facility, which will be undrawn at the closing of the recapitalization. Given the inherent volatility of the sector, Standard & Poor's ratings reflect anticipated performance throughout an operating cycle.
Heartland's bank loan is rated single-'B', the same as the company's corporate credit rating. The facility is secured, which may provide some measure of protection to lenders. However, based on Standard & Poor's simulated default scenario, it is not clear that a distressed value would be sufficient to cover the entire loan facility.
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