TEXT - Fitch rates ConAgra new credit facilities 'BBB-'

Mon Dec 31, 2012 1:51pm EST

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Dec 31 - Fitch Ratings has assigned a 'BBB-' to ConAgra Foods Inc's.
 (Conagra) new $1.5 billion five-year senior unsecured term credit
facility (term facility) and $4.5 billion 364-day bridge credit facility (bridge
facility). On Dec. 27 and 28 ConAgra filed or announced a series of corporate
actions associated with financing its acquisition of Ralcorp Holdings, Inc.
(Ralcorp). The $6.8 billion acquisition, which included assumed debt, was
expected to be predominantly debt-financed. 

Specifically, on Dec. 27 the company filed that on Dec. 21, 2012 it had 
established the $1.5 billion unsecured term loan and the $4.5 billion unsecured 
364-day bridge facility and also amended its current $1.5 billion revolving 
credit agreement. On Dec. 28, 2012 the company also announced an exchange offer 
for up to $750 million in Ralcorp notes. 

Pursuant to the exchange offering, Fitch expects to rate ConAgra senior 
unsecured notes issuance (new notes) 'BBB-'. Fitch's ratings of ConAgra's debt 
are listed below.

The new notes will rank equal to the company existing senior unsecured 
indebtedness. The securities will be exchanged for any and all of Ralcorp 
Holdings, Inc. (Ralcorp) existing 4.950% notes due Aug. 15, 2020 for up to an 
aggregate principal amount of $300 million and for its existing 6.625% notes due
Aug. 15, 2039 up to an aggregate principal amount of $450 million. The new notes
are expected to be issued with identical interest rates and maturity terms as 
the Ralcorp notes. The early tender offer exchange date for the existing Ralcorp
notes is Jan. 14, 2013; the expiration date is Jan. 29 2013 

Proceeds under the bridge and term facilities are expected to be used to fund 
the company's acquisition of Ralcorp Holdings, Inc. (Ralcorp). The term facility
may be increased to up to $2.0 billion, matures on the fifth anniversary of the 
acquisition closing date, and amortizes 2.5% per quarter commencing on June 1, 
2013. Fitch anticipates that the company will refinance any borrowings under the
bridge facility. 

The bridge and term loan have similar requirements as the revolver but loosens 
the leverage covenant to accommodate the acquisition in the near term. 
Additionally there is also a spring-in guarantee in certain events. The existing
revolver was amended on Dec 21, 2012 to harmonize with changes in the new 
facilities. The key change to the leverage covenant was that consolidated funded
debt must not exceed 75% of the consolidated capital base for four quarters 
including the acquisition quarter and 70% for the following four quarters before
reverting to the original 65%. Further, if the company's debt is non-investment 
grade upon closing then all material wholly-owned domestic subsidiaries must 
guarantee the obligations. The guarantees would be released when the company 
becomes investment grade. The company is expected to remain in compliance with 
its covenants. 

The acquisition is expected to close by March 31, 2013, pending Ralcorp's 
shareholders' and regulatory approvals. The combined company will be one of the 
largest packaged food companies in North America, with net sales of 
approximately $18 billion. In addition to the company's significant branded food
presence, ConAgra will be the largest private-label food company in the U.S., 
increasing ConAgra's approximately $950 million private-label sales to $4.5 
billion. Revenue sources will be more balanced, consisting of 43% branded and 
25% private-label packaged foods through the retail channel and 32% to the 
commercial/foodservice markets. 

ConAgra's leverage will increase substantially with this combination, resulting 
in financial metrics that are weak for the rating category in the near term. 
Fitch estimates that pro forma total debt to EBITDA will initially be slightly 
more than 4.0x, factoring in the use of a portion of ConAgra's $476.8 million 
cash at Nov. 25, 2012. Nonetheless, the company's commitment to de-leveraging, 
good liquidity, and the strength of the strategic combination support the 'BBB-'
ratings. 

Fitch has factored into the ratings ConAgra's commitment to prioritize its free 
cash flow (FCF) for debt reduction within 18 to 24 months after the transaction 
closes. Maintaining the current dividend level and very modest share repurchases
should support the significant debt reduction needed to retain investment-grade 
ratings. Fitch believes ConAgra's target of approximately $225 million in annual
cost savings by the fourth full fiscal year after the closing, driven by supply 
chain and SG&A efficiencies, will be achievable, based on similar transactions. 
However, Fitch believes the near-term benefit is likely to be outweighed by 
costs to achieve those synergies. 

The acquisition of Ralcorp is in line with ConAgra's strategic growth objective 
to increase its exposure to private label. Private label historically has grown 
faster than branded packaged food. The transaction has good strategic rationale 
as both companies operate primarily in the center of the store in complementary 
categories without significant overlap between branded and private-label 
products. ConAgra will benefit from Ralcorp's higher margin predominantly 
private-label portfolio. However, with both companies operating primarily in the
United States, this transaction does not broaden their geographic exposure to 
faster growing markets. Both companies have recently been highly acquisitive, 
and that is also taken into consideration for the ratings. Acquisitions are not 
anticipated until leverage is solidly in line with the rating level. 

ConAgra is expected to maintain adequate liquidity, including a portion of its 
cash balance, and a substantial part of its currently undrawn $1.5 billion 
revolving credit facility that matures Sept. 14, 2016. The credit facility 
provides backup to ConAgra's commercial paper (CP) program. 

Upcoming long-term debt maturities are manageable. Fitch anticipates ConAgra is 
likely to refinance and/or use cash to pay down part of its next significant 
debt maturities, which are $500 million 5.875% notes due in April 2014 and $250 
million 1.35% notes due Sept. 10, 2015. 

What Could Trigger a Rating Action 

Future developments that may, individually or collectively, lead to a negative 
rating action include: 

--If ConAgra's planned debt reduction falters significantly, which could occur 
due to shortfalls in earnings/cash flow, such that leverage remains at or above 
the mid-3.0x range. 

Future developments that may, individually or collectively, lead to a positive 
rating action include: 

-- A positive rating action is not anticipated in the near term. Beyond this 
timeframe, a positive rating action could be supported by substantial and 
growing FCF generation, along with leverage (total debt-to-operating EBITDA) 
consistently in the mid-2x range. 

--Maintenance of conservative financial policies, such as publicly stating that 
its financial strategies no longer include large acquisitions that require 
substantial debt financing, could also support an upgrade. 

Fitch currently rates ConAgra Foods, Inc. as follows:

--Long-term Issuer Default Rating (IDR) 'BBB-'; 
--Senior unsecured notes 'BBB-';
--$1.5 Revolving Credit Agreement 'BBB-';
--$1.5 billion 5 year senior unsecured term credit facility 'BBB-';
--$4.5 billion 364 day bridge credit facility; 
--Subordinated notes 'BB+';
--Short-term IDR 'F3';
--CP 'F3'.
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