Fitch affirms several Kraft ratings; outlook stable

by Eric Schroeder
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CHICAGO — Fitch ratings has affirmed several ratings for Northfield, Ill.-based Kraft Foods Inc., including the company’s long-term issuer default rating at BBB-, senior unsecured debt at BBB-, credit facility at BBB-, and short-term issuer default rating and commercial paper at F3. The company’s outlook remains “stable.”

Additionally, Fitch withdrew the F3 short-term issuer default rating of Cadbury P.L.C., reflecting the idea that Kraft does not intend to issue any additional debt at the Cadbury level. Kraft terminated Cadbury’s £450 million credit facility in June 2010.

“The ratings continue to reflect Kraft’s 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 said. “The ratings also consider the strategic benefits of acquiring Cadbury’s confectionery business, offset by the material increase in leverage. Kraft acquired Cadbury for $18.5 billion (60% cash and 40% stock) and assumed $2.4 billion of Cadbury debt in 2010. The combination with Cadbury strengthens Kraft’s platform in confectionery and provides it with greater geographic reach, particularly in faster growing developing markets.

“Although integration risk remains, it has largely been reduced as Kraft has assimilated its operations and cultures. As the company works to integrate Cadbury and focuses on debt reduction, Fitch expects share repurchases to be minimal.”

Fitch said Kraft’s debt reduction in 2010 is likely to be greater than the ratings service had anticipated due to Kraft’s $1.5 billion debt tender that was mostly funded from cash. Fitch has estimated Kraft’s total debt at approximately $29 billion as of Dec. 31, 2010.

“Fitch expects Kraft to reduce leverage in 2011 due to increased profits and debt reduction from internally generated funds or cash on hand,” Fitch said. “Leverage at or near 3x, combined with improvement in operating performance and cash flow, could result in positive ratings momentum. Fitch also expects a commitment from Kraft to operate with less leverage over an extended period of time. Heightened commodity costs may be a headwind to achieving near-term debt reduction goals, as recent pricing actions have lagged the surge in commodity costs. Also, with consumers remaining value conscious, they are not likely to be receptive to higher prices and, as a result, volumes and profitability are likely to be pressured in the near term.”

Free cash flow in 2011 should improve materially from 2010, Fitch said, noting that cash flow was affected adversely by non-recurring items such as up-front cash costs to achieve synergies, acquisition related costs, and $1.2 billion estimated tax payments on the frozen pizza divestiture.

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