Moody's assigns Baa2 rating to Kraft spin-off
May 25, 2012
by Josh Sosland
NEW YORK — The prospective grocery foods spin-off of Kraft Foods, Inc. has been given a first-time Baa2 credit rating by Moody’s Investors Service. The new company, Kraft Foods Group, Inc., will be spun off later this year.
Moody’s also assigned a Prime-2 rating to the company’s proposed $3 billion commercial paper program. The rating outlook is stable. Moody’s attributed its rating to the high profit margins, stable earnings and cash flow, leading market shares and diversified portfolio. The spin-off business will offer products such as Kraft macaroni and cheese, Oscar Mayer meats, Philadelphia cream cheese, Maxwell House coffee, Capri Sun beverages, Jell-O desserts and Miracle Whip salad dressing.
The agency noted that the massive transaction is not without risks.
“These credit strengths are balanced against the company’s high geographic concentration of revenues in the low growth U.S. food industry, and Moody's anticipation of future operational challenges following the spin-off including inefficiencies related to fixed cost absorption and possible uneven sales performance due to a recent shift from an in-house to a brokered retail sales strategy,” Moody’s said. “The Prime-2 commercial paper program will be fully supported with committed back-up lines.”
In addition to Kraft Foods Group, the $18 billion North American grocery business, Kraft Foods Inc. is planning to spin off Mondelez International, Inc., primarily of Kraft’s $35 billion global snacks business. Citing filings with the Securities and Exchange Commission, Moody’s said Kraft Foods Group will be capitalized with $10 billion of debt.
“Moody’s expects that it would assign a Baa2 long-term debt rating to any senior unsecured debt of Kraft Foods Group,” the ratings agency said. “Proforma for the spinoff, financial leverage at Kraft Foods Group is modest (Moody’s adjusted debt/EBITDA is below 3.5 times) and liquidity is solid. Details of Kraft Foods Group’s financial policy, including dividend payout rate, have been not been disclosed, however Moody’s assumes periodic strategic acquisitions, a peer-average dividend policy, and limited share repurchase activity.
“A rating upgrade could occur if Kraft Foods Group sustains stable operating performance and financial policy, and debt/EBITDA falls below 3.0 times. A rating downgrade could occur if the company's operating performance weakens or financial policy becomes more aggressive such that EBITDA margins fall below 15% or debt/EBITDA approaches 4.0 times.”