US: Fitch downgrades Kraft credit rating
Fitch has downgraded Kraft Foods' credit rating after the US food group's GBP11.9bn (US$19.4bn) offer to acquire UK confectioner Cadbury.
According to ratings agency Fitch, the deal - which is made up of a 60% cash component - is likely to use the US$1.3bn Kraft recently raised from the sale of its pizza business to Nestle.
However, the rest of the cash portion of Kraft's offer will be financed by debt, which has prompted concerns over the US group's plans for cost cuts and its ability to invest in Cadbury.
Kraft's incremental debt, Fitch said, will total around $12.7bn, taking into consideration the pizza proceeds and the assumed debt from Cadbury.
If the proposed acquisition goes ahead as expected, Kraft's pro-forma debt will initially be nearly $32bn, resulting in pro-forma leverage of around four times total debt to operating EBITDA, Fitch suggested.
Additionally, Fitch suggested that a combined Kraft and Cadbury will be slow to repay debt due $1.3bn in one-off costs the group will incur to implement its cost-cutting plan, which is expected to generate annual synergies of $675m.
Fitch moved to downgrade Kraft's issuer default rating (IDR) one grade to BBB-, its senior unsecured debt to BBB- from BBB, its credit facility to BBB- from BBB and its commercial paper F3 from F2.
Meanwhile, Moody's Investors Service said that it is reviewing a downgrade, but added that Kraft would likely retain its investment grade rating.
"If a rating downgrade should occur, it likely would be limited to one notch to Baa3/Prime-3, Moody's lowest investment-grade ratings," Moody's said.
Speaking during a conference call yesterday, Kraft management said that while its leverage would exceed normal bounds it was "confident" of retaining its investment grade rating.
CFO Timothy McLevish indicated that Kraft expected the enlarged group to generate sufficient earnings and cash flow to restore its investment grade profile within 18-24 months.
While McLevish said that Kraft was always evaluating its portfolio, he added that the company did not currently have any plans to divest units in order to pay down debt.
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