January 20, 2010 / 1:02 PM / 8 years ago

UPDATE 1-Fitch downgrades Kraft, Cadbury on takeover plan

* Ratings one notch above junk

* Rating outlook stable

* Expects combined company to cut debt

* For a related column please click on [ID:nLDE60J0JA]

(Adds Fitch comment on deal, detail on S&P rating, shares)

By Simon Jessop

LONDON, Jan 20 (Reuters) - Kraft Foods Inc KFT.N and Cadbury Plc CBRY.L saw their credit ratings slashed by ratings agency Fitch to the lowest investment grade after Kraft won Cadbury’s backing for its $19.6 billion takeover bid.

Fitch said on Wednesday it had downgraded its issuer default rating on both companies one notch to BBB-. [ID:nLDE60J0TL]

Late Tuesday, rival ratings agency Moody’s said Kraft’s credit ratings would likely remain investment grade following the deal, but were under review for a possible downgrade. [ID:nN19223781]

Separately Standard & Poors said it would keep an A- long-term corporate credit on Kraft, creditwatch negative, and a BBB rating on Cadbury, creditwatch with “developing implications”.

In a statement Fitch said its downgrades “reflect the anticipated increase in financial leverage of the combined Kraft/Cadbury”.

The deal will result in Kraft paying 500 pence in cash plus 0.1874 of a new Kraft share for each Cadbury share. The cash portion of around $11.2 billion will be financed with debt. [ID:nL9294700]

Fitch said it expected the combined company’s leverage to reduce to around 3 or 3.5 times EBITDA from 4 times within two years, through growth of earnings and repayment of debt through free cash flow.

“This level is considered commensurate with the ‘BBB-’ rating,” it said. At 1232 GMT, shares in Cadbury were little changed at 836-1/2 pence, slightly outperforming a weaker FTSE 100, while Kraft shares traded in Frankfurt were up 1.2 percent at 20.6 euros. (Editing by Hans Peters and David Holmes) (simon.jessop@thomsonreuters.com; +44 207 542 5052))

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