TEXT-Fitch rates Kellogg's senior unsecured notes 'BBB+'

Fri Feb 8, 2013 12:51pm EST

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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
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