TEXT-Fitch rates Kellogg's senior unsecured notes 'BBB+'
Feb 8 - Fitch Ratings has assigned a 'BBB+' rating to Kellogg Company's (Kellogg) $750 million senior unsecured notes issuance with the following tranches: --$400 million due in 2023; --$250 million due in 2015. Kellogg's Rating Outlook is Negative. Kellogg intends to use the net proceeds from this debt issuance for general corporate purposes including the repayment of its $750 million 4.25% senior notes maturing on March 6, 2013. The new notes contain a Change of Control Repurchase Event. Upon the occurrence of both a Change of Control and rating downgrades below investment grade, unless Kellogg exercises its right to redeem the notes, the company will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount plus accrued and unpaid interest. The note indenture contains limitations on liens and sale-leasebacks but does not contain financial covenants. KEY RATING DRIVERS: Kellogg's ratings incorporate its #1 and #2 market share positions, strong brand equities, and ample liquidity. The company is diversified geographically, with more than 40% of 2012 sales generated outside of the United States. However, Kellogg has significant exposure to slow-growing, mature markets and modest exposure to faster growing emerging markets. The ratings also reflect Fitch's view that operating earnings growth beyond 2012, combined with significant debt reduction from free cash flow, could restore leverage near pre-acquisition levels within two years. The company's debt balance was $7.9 billion at year end, up from $6 billion in 2011 reflecting the $2.7 billion Pringles acquisition which closed May 2012. Kellogg has committed to reduce debt by refraining from share repurchases beyond offsetting the dilution from stock option exercises, in order to focus on debt reduction. The Negative Outlook reflects that near-term leverage (total debt to operating EBITDA) of slightly more than 3.0 times (x) will be high for the rating level and a significant increase from 2.5x prior to the Pringles acquisition. The Outlook also considers that Kellogg's debt reduction plans could be impeded by significant re-escalations in commodity costs particularly as the company is planning to increase investments in brand building behind innovations. Financial Performance: In 2012 the company's revenues increased 7.6% as acquisitions provided 6.7% and organic growth of 2.5% more than offset 1.4% of negative foreign exchange translation. Kellogg adopted a new method for accounting for pensions which resulted in a non-cash mark to market charge of $452 million in operating profit. Excluding this charge, EBITDA was essentially flat at $2.5 billion. Leverage was approximately 3.2X but remains within Fitch's expectations at this juncture. The company's ample free cash flow (FCF, cash flow from operations less capital expenditures and dividends) was over $600 million in 2012 after averaging just $400 annually during the past five years. The lower levels had been influenced by substantial pension and postretirement contributions. As a result, Fitch had expected that Kellogg's FCF would improve to the $700 million range in 2014 or 2015, and it appears the company is well on the path to doing so. The trajectory of FCF supports the company's goal of rapid deleveraging. After paying down the $750 million notes due in March 2013, debt maturities through 2015 are modest. In 2014 CAD$300 million notes for Kellogg Canada, Inc. (under a full parent guarantee) and the new $250 million notes due in 2015 and discussed above are due. The next significant debt maturities are in 2016 when two notes totaling $1.3 billion are due. With more than $2 billion in revolving credit availability, high levels of free cash flow and strong access to the capital markets, the company's liquidity remains considerable. SENSITIVITY Future developments that may, individually or collectively, lead to a positive rating action include: Fitch could revise the Outlook to Stable if Kellogg's operating earnings trends show sustainable improvement, or if debt reduction occurs at a faster rate than anticipated so that leverage appears likely to be sustainable in the mid-2x range by mid- 2014. Future developments that may, individually or collectively, lead to a negative rating action include: A one notch downgrade could occur if Kellogg's operating performance substantially deteriorates from current expectations, or if debt reduction is slower than anticipated, resulting in leverage that is likely to be at or near 3.0x in mid-2014. A downgrade could also occur if Kellogg becomes more aggressive with share repurchases or acquisitions. Fitch rates Kellogg and its subsidiaries' as follows: Kellogg --Long-term Issuer Default Rating (IDR) 'BBB+'; --Senior unsecured debt 'BBB+'; --Bank credit facility 'BBB+'; --Short-term IDR 'F2'; --Commercial paper (CP)'F2'. Kellogg Europe Company Limited --Long-term IDR 'BBB+'; --Short-term IDR 'F2'; --CP 'F2'. Kellogg Holding Company Limited --Long-term IDR 'BBB+'; --Short-term IDR 'F2'; --CP 'F2'. Kellogg Canada, Inc --Long-term IDR 'BBB+'; --Senior unsecured debt 'BBB+'. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology