OREANDA-NEWS. S&P Global Ratings said today that it lowered its corporate credit rating on Pilgrim's Pride Corp. to 'BB' from 'BB+'. The rating outlook is stable.

At the same time, we lowered our issue-level ratings on the company's $700 million revolving credit facility and $1 billion first-lien term loan due 2020 to 'BBB-' from 'BBB'. The '1' recovery ratings are unchanged, indicating our expectation for very high recovery (90%-100%) of principal in the event of a payment default.

We also lowered our issue-level rating on the company's senior unsecured notes due 2025 to 'BB' from 'BB+'. The '3' recovery rating is unchanged, indicating our expectation for meaningful recovery (50%-70%; upper half of the range) of principal in the event of a payment default.

We estimate that Pilgrim's Pride had about $1.1 billion in reported debt outstanding as of June 26, 2016.

"The rating actions on Pilgrim's Pride follow the downgrade of its parent company, Brazilian protein processor JBS S. A., due to deteriorating operations in the company's poultry and cattle segments, and the costs to liquidate all of its derivative positions," said S&P Global Ratings' credit analyst Jessica Paige. (For more information, see "Research Update: JBS S. A. And JBS USA Downgraded To 'BB' From 'BB+' On Weaker Liquidity; Outlook Stable," published Aug. 12, 2016, on RatingsDirect).

We consider Pilgrim's Pride a highly strategic subsidiary of JBS, based on our criteria. We don't believe Pilgrim's Pride corporate credit rating should be higher than JBS' because we believe JBS could continue to take large dividend payments from the company as it has done in each of the past two years. Moreover, JBS' cash position declined significantly to $1.5 billion in the second quarter of 2016 from $15 billion in the first quarter of 2016, partly due to working capital needs and the cost to liquidate its derivative positions. Therefore, we believe there is a high likelihood of Pilgrim's Pride making large dividends to the parent because JBS' liquidity position is reduced. As such, we cap our corporate credit rating on Pilgrim's Pride at 'BB'. The cap also reflects JBS' majority ownership of Pilgrim's Pride and our view that Pilgrim's Pride is a highly strategic subsidiary.

The stable rating outlook on Pilgrim's Pride reflects the stable rating outlook on its parent, JBS, and our view that Pilgrim's Pride will remain a highly strategic subsidiary of JBS, with a credit profile that cannot be higher than its parent, based on our criteria.

Our current one-notch downgrade of Pilgrim's Pride follows JBS' recent downgrade due to lackluster second-quarter 2016 performance and a weakened liquidity position. We could downgrade Pilgrim's Pride further if the company's operating performance weakens unexpectedly or if its debt to EBITDA approaches or exceeds 3.5x on a sustained basis. We believe this could occur if corn costs return to about $7 per bushel or higher and the company cannot raise prices high enough to offset the higher feed costs, or if the company pursues a debt-financed acquisition or another leveraged dividend.

We could upgrade Pilgrim's Pride if we raise our corporate credit rating on JBS, if we continue to view Pilgrim's Pride as a highly strategic subsidiary, and if the company maintains debt to EBITDA near or below 2x. We could upgrade JBS if it improves the performance of its relevant businesses and adds liquidity cushion. Under this scenario, JBS' beef margin would approach 5% and Seara's 12%, while the company gradually extends its debt maturities, so its cash sources over cash uses exceed 1.2x.