Fitch Rates Kraft Foods' $800MM Sr. Unsecured Floating Rate Notes 'BBB-'

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CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB-' rating to Kraft Foods Inc.'s (Kraft) (NYSE: KFT) $800 million senior unsecured floating rate notes due July 10, 2013. The floating interest rate is based on three month LIBOR plus 87.5 basis points.

Net proceeds from this debt issuance are expected to be used for general corporate purposes, including debt repayment. The notes contain a special mandatory redemption feature requiring Kraft to redeem all of these notes five business days prior to the date it spins-off its North American Grocery Business (referred to as NA Grocery). The spin-off is anticipated to occur by the end of 2012. In addition, the notes contain a Change of Control Triggering Event. Upon the occurrence of both a Change of Control and rating downgrades below investment grade, unless Kraft has redeemed the notes, note holders can require Kraft to repurchase all or part of their notes at a price equal to 101% of the aggregate principal amount of the notes repurchased plus accrued and unpaid interest, if any. The notes will be issued under Kraft's indenture dated Oct. 17, 2001, which contains limitations on liens and sale-leasebacks but does not contain financial covenants.

Fitch plans to review Kraft's ratings during the next few weeks, incorporating the company's progress toward completion of the spin-off. Thus far, tax filings in the U.S. and Canada are on track, organizational designs are underway and brand/licensing structures are finalized. The CEO and Chairman of each company were announced. The transaction is subject to the receipt of an IRS tax-free ruling, Kraft's final Board approval and other customary conditions. Kraft has stated a commitment to maintain investment grade ratings with access to commercial paper.

Each separate company will still maintain substantial scale to compete effectively, despite losing some diversification. NA Grocery will primarily consist of Kraft's current U.S. Beverages, Cheese, Convenient Meals and Grocery segments, grocery-related categories in its Canada and N.A. Foodservice segment as well as the Planters and Corn Nuts businesses. It will be one of the largest food and beverage companies in North America with approximately $17 billion of estimated annual revenue. NA Grocery is expected to have operating margins above the company average, strong free cash flow (FCF) generation and leading market positions in most categories. Balancing out these positive factors will be NA Grocery's slower growth in line with its mature North American packaged food categories and a high dividend. NA Grocery is also likely to have a higher effective tax rate as it loses the benefit from some overseas rate differences. Global Snacks will have approximately $31 billion of revenues and consist of Kraft's current Europe and Developing Markets units as well as its North American snacks and confectionery businesses. Global Snacks will be a faster growth company with approximately 42% of its revenues generated in developing markets. Offsetting the strong growth prospects are lower margins, higher foreign exchange volatility and the discretionary nature of the snack category.

Kraft's current ratings 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. The ratings factor in continued deleveraging and synergies from the Cadbury acquisition. Kraft has generated strong operating performance year to date in 2011 with sequentially higher sales growth. It produced high single-digit organic sales growth in the third quarter of 2011 while maintaining slightly positive volume/mix. However, when broken down by geography, strong volume/mix in developing markets was partially offset by a modest volume decline in North America. These divergent growth trends are likely to continue.

Underlying operating income (excluding acquisition-related and integration program costs) grew 10.4% year-to-date to $5.5 billion. However, year-to-date FCF of negative $1.2 billion was adversely impacted by changes in working capital related to heightened commodity costs, higher pension contributions and Cadbury integration costs. Kraft expects a low teen percentage increase in input costs in 2011 and further increases in 2012, though at a more moderate pace. Higher pricing outpaced increased input costs year to date through the third quarter of 2011.

Kraft has ample liquidity with $2 billion cash at Sept. 30, 2011 and $4.5 billion of undrawn capacity on its four-year senior unsecured revolving credit facility expiring in April 2015. The company continues to maintain significant headroom under its minimum total shareholders' equity covenant. Total debt at Sept. 30, 2011 was $28.9 billion and is anticipated to be below $28 billion at Dec. 31, 2011. The decline in debt factors in the repayment of Kraft's $1.1 billion notes upon maturity in November 2011 with cash. Kraft has two consecutive years of large upcoming debt maturities, including $3.5 billion due in 2012 and $3.6 billion due in 2013. The company expects to fund upcoming debt maturities with cash from operations, CP issuance and additional debt issuance, including the new notes described above. Kraft has not yet committed to how much of the maturities it will refinance versus repay with cash. The company expects to provide more details regarding capital structure when it files a Form 10 in the second quarter of 2012. The ratings of each of the two separate companies will ultimately be based on Fitch's evaluation of their business profiles, capital structures and FCF generation.

For the latest 12 months ended Sept. 30, 2011, Kraft's total debt to operating EBITDA was approximately 3.5 times (x) and operating EBITDA to gross interest expense was approximately 4.4x. With the debt reduction noted above, Fitch estimates that Kraft's total debt to operating EBITDA was near 3.0x for the year ending Dec. 31, 2011.

Fitch currently rates Kraft and its subsidiaries as follows:

Kraft Foods Inc.

--Long-term Issuer Default Rating (IDR) 'BBB-';

--Senior unsecured debt 'BBB-';

--Credit facility 'BBB-';

--Short-term IDR 'F3';

--Commercial paper 'F3'.

Cadbury plc

--Long-term IDR 'BBB-'.

Cadbury Schweppes U.S. Finance

--Long-term IDR 'BBB-;

--Senior unsecured debt 'BBB-'

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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