Sept 10 (The following statement was released by the rating
Sept. 10 - Fitch Ratings has upgraded the ratings of Kraft
Foods Inc. (Kraft) and its subsidiaries as follows:
Kraft Foods Inc.
--Long-term Issuer Default Rating (IDR) to 'BBB' from 'BBB-';
--Senior unsecured debt to 'BBB' from 'BBB-';
--Credit facility to 'BBB' from 'BBB-';
--Short-term IDR to 'F2' from 'F3';
--Commercial paper to 'F2' from 'F3'.
--Long-term IDR to 'BBB' from 'BBB-'.
Cadbury Schweppes U.S. Finance
--Long-term IDR to 'BBB' from 'BBB-';
--Senior unsecured debt to 'BBB' from 'BBB-'.
The Rating Outlook is Stable.
The rating upgrades incorporate Fitch's expectations for Kraft after it spins
off its North American Grocery business (Kraft Foods Group, Inc., or KRFT) and
changes its name to Mondelez International, Inc. (Mondelez, or MDLZ) on Oct. 1,
2012. The ratings do not apply to any of the debt of Kraft Foods Group, Inc.
Mondelez generated 2011 pro forma net revenue of approximately $36 billion and
will consist of Kraft's Europe and Developing Markets segments as well as its
North American snacks and confectionary businesses. Mondelez will be one of the
largest global packaged food companies and maintain substantial scale to compete
effectively despite losing the diversification from its $19 billion North
American Grocery business. Fitch's expectation is that Mondelez will generate
faster growth than consolidated Kraft, with 44% of its sales in geographically
diversified Developing Markets. Partially offsetting the stronger growth
prospects are significant exposure to mature but relatively stable markets in
developed Europe (37%) and North America (19%), lower margins than historical
Kraft, higher foreign exchange volatility and the discretionary nature of the
Mondelez's ratings will reflect its prominent size and scale within the global
packaged foods industry, its leading market share positions in most of its
categories, and many strong brand equities. The company's business profile,
capital structure, financial strategies and free cash flow (FCF) generation
support its solid investment grade ratings. The ratings for Mondelez incorporate
Fitch's expectations that the company will utilize approximately $2 billion of
its available cash to repay a portion of its debt maturing in 2013. Mondelez
will achieve a level of approximately $18 billion of total debt with the
anticipated debt reduction. Prior to the debt reduction, Mondelez will initially
have high gross leverage for the rating level along with high cash balances. In
the 2013-2014 timeframe, Fitch anticipates Mondelez's leverage (total debt to
operating EBITDA) will be in the mid-to-high 2x range and should improve over
time with EBITDA growth.
Fitch expects Mondelez can generate good operating performance although it is
likely to see some near-term deceleration due to the challenging economic
environment putting pressure on consumers' spending on food. The company has
generated strong growth in chocolate and biscuits partially offset by slow
growth in gum, which is more economically sensitive. Mondelez expects long-term
gross margin expansion due to higher pricing to offset input cost inflation,
improving product mix and productivity initiatives at 4% or more of 'cost of
goods sold'. Since Mondelez has a significant skew toward faster growing
developing markets, its long-term currency neutral sales growth guidance seems
reasonable at 5% - 7%. However, the company faces challenges in 2013 such as a
lower contribution from pricing and continued difficult economic conditions
which will likely lead to constant currency revenue growth at the lower end of
the long-term range.
MDLZ should generate substantial and growing free cash flow (FCF) with a
moderate dividend payout and capital expenditures above Kraft's historical
mid-3% of sales level to support developing markets growth. The company's FCF
priorities include reinvesting in its business, tack-on acquisitions, primarily
in developing markets, and returning cash to shareholders, within the context of
maintaining stable ratings. Given those significant priorities, Fitch does not
currently factor into the ratings additional debt reduction beyond the $2
billion mentioned above that will be used to repay a portion of 2013 maturities.
The company does not currently have Board of Directors' authorization for share
Mondelez's ample liquidity is expected to consist of most of Kraft's substantial
$4.6 billion cash balance at June 30, 2012, as well as its undrawn $4.5 billion
four-year senior unsecured revolving credit facility expiring in April 2015.
Fitch anticipates that Mondelez will amend Kraft's minimum total shareholders'
equity covenant amount of $28.6 billion to account for the reduced size of the
company and maintain adequate headroom. Kraft's $800 million floating rate notes
(FRNs) due July 10, 2013 are required to be redeemed prior to the spinoff at
100% plus interest. Fitch anticipates that Kraft is likely to utilize its large
cash balance to repay these notes. Mondelez has substantial upcoming debt
maturities of $3.6 billion throughout 2013 which the company expects to fund
with cash and new borrowings. The four note maturities in 2013 have interest
rates ranging from 2.625% to 6.0%.
What Could Trigger a Rating Action:
Future developments that may, individually or collectively, lead to a positive
rating action include:
--Substantial and growing FCF generation, along with leverage (total debt to
operating EBITDA) consistently in the mid-2x range and maintenance of
conservative financial policies, such as refraining from a high dividend payout;
--Consistently achieving the high end of the company's revenue and earnings
Future developments that may, individually or collectively, lead to a negative
rating action or negative Outlook include:
--If earnings or cash flow falter significantly or financial policies become
more aggressive, such that leverage is consistently above 3.0x with no plan to
--If the company fails to repay at least $2 billion of 2013 debt maturities,
concurrent with credit measures not improving.
Judi M. Rossetti, CPA/CFA
70 W. Madison Street
Chicago, IL 60602
Wesley E. Moultrie II, CPA
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: