Fitch upgrades Kraft ratings in advance of spin-off

by Eric Schroeder
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CHICAGO — Fitch Ratings has upgraded several ratings for Kraft Foods Inc. and its subsidiaries, including long-term issuer default rating to “BBB” from “BBB-“; senior unsecured debt to “BBB” from “BBB-“; credit facility to “'BBB” from “BBB-; and short-term issuer default rating to “F2” from “F3.” A BBB rating is defined by Fitch as an investment grade rating for medium class companies that are satisfactory at the moment.
Fitch maintained its “stable” outlook for the company.

“The rating upgrades incorporate Fitch’s expectations for Kraft after it spins off its North American Grocery business and changes its name to Mondelez International, Inc. on Oct. 1, 2012,” Fitch said. “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 confectionery businesses.”

Fitch said it expects 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 and North America, lower margins than historical Kraft, higher foreign exchange volatility and the discretionary nature of the snack category, Fitch said.

“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,” Fitch noted. “The company’s business profile, capital structure, financial strategies and free cash flow 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.”

Mondelez is expected to generate “good operating performance,” Fitch said, adding some near-term deceleration may occur 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,” Fitch said.

Fitch said it also expects Mondelez to generate substantial and growing free cash flow 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 (free cash flow) 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,” Fitch said. “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 repurchases.”

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