New York-based Moody's Investors Service has confirmed the Baa1 senior unsecured and Prime-2 short term ratings for US food giant General Mills (GM), and changed the outlook on its senior unsecured debt to negative from stable.

This action, said Moody's, follows continued soft operating performance in GM's core US market, as well the competitive challenges the company will face in restoring profitable volume growth and improving debt protection measures in the near term. Should GM be unable to generate volume improvements, reduce debt, improve its debt protection measures, and lengthen the term of its capital structure, its ratings could be downgraded.

GM operating performance has weakened in the months following its acquisition of Pillsbury on 31 October 2001.

A low level of marketing and promotional programmes in late 2001, and a lack of successful product introductions in 2002 has resulted in reduced volume and lost market share in GIS' core US markets. These weak volumes continued in GM's Q4 ended 26 May 2002. This level of performance, along with increased expectations for capital expenditures (around US$750m for FY'02) and its continuing high dividend (over US$400m), will result in GIS repaying little to no debt over the next year.

This weakened performance comes at a difficult time as GM incurred over US$6bn in incremental debt in relation to the Pillsbury acquisition. GM's debt protection measures will remain very weak for a Baa1 credit, and below those anticipated when the Baa1 rating was assigned in November 2001.

"We note that while the Pillsbury integration appears to be on track," said Moody's, "GM continues to face integration risk as it combines Pillsbury's distribution and information systems with its own over the next year. We also note that GM continues to have a material degree of refinancing risk over the next seven months as it seeks to issue up to US$4bn in long term debt to term out commercial paper issued to fund the Pillsbury acquisition.

"To respond to these its volume challenges, GM plans to introduce up to 80 new products during FY2003 across its product lines, and spend heavily to support those products.

"It also expects to generate up to US$350m in synergies from its Pillsbury acquisition. While GM has a good track record of introducing successful new products, we believe the company will be challenged to significantly increase volumes, generate free cash flow, and improve debt protection measures in the near to intermediate term."

Competition in GM's categories is fierce, with competitors such as Campbell, ConAgra, and Sara Lee each increasing product introductions and marketing support. GM's ratings reflect the its strong portfolio of branded packaged food products, leading market shares, and stable cash flows. Ratings also reflect the continuing integration risk of combining Pillsbury's operations with its own, as well as GM's historically aggressive financial policy - which has included high dividends and in past years, share repurchases.