Fitch Rates ConAgra's $3.975 Billion Sr. Unsec Notes 'BBB-'
CHICAGO -- January 15, 2013
Fitch Ratings has assigned a 'BBB-' to ConAgra Foods Inc.'s (Conagra) $3.975
billion senior unsecured notes consisting of $750 million 1.30% notes due in
2016, $1 billion 1.90% notes due in 2018, $1.225 billion 3.20% notes due in
2023 and $1 billion 4.65% notes due in 2043. These notes are part of the
financing of ConAgra's $6.8 billion acquisition of Ralcorp Holdings, Inc.
(Ralcorp), including assumed debt. The acquisition is predominantly
debt-financed, but ConAgra also plans to utilize $269 million proceeds from
the company's recent equity issuance and estimated cash and equivalents of
$564 million at the acquisition closing. If the acquisition is not completed
for any reason by August 2013, ConAgra will be required to redeem the notes in
a special mandatory redemption.
The notes will be issued under the company's indenture dated Oct. 8, 1990. The
new notes will rank equal to the company existing senior unsecured
indebtedness. The indenture contains limitations on secured indebtedness and
certain sale/leaseback transactions; however, there are no financial covenants
or other restrictive covenants. The notes contain a Change of Control Offer.
Upon the occurrence of both a Change of Control and rating downgrades below
investment grade, unless ConAgra has exercised its right to redeem the notes
or the conditions of the special mandatory redemption have occurred, the
company will be required to make an offer to purchase the notes at a price
equal to 101% of the aggregate principal amount plus accrued and unpaid
interest to the date of purchase.
The acquisition is expected to close by March 31, 2013, pending Ralcorp's
shareholders' approval. The combined company will be one of the largest
packaged food companies in North America, with net sales of approximately $18
billion. In addition to the company's significant branded food presence,
ConAgra will be the largest private-label food company in the U.S., increasing
ConAgra's approximately $950 million private-label sales to $4.5 billion.
Revenue sources will be more balanced, consisting of 43% branded and 25%
private-label packaged foods through the retail channel and 32% to the
KEY RATING DRIVERS:
ConAgra's leverage will increase substantially with this combination,
resulting in financial metrics that are weak for the rating category in the
near term. Fitch estimates that pro forma total debt to EBITDA will initially
be slightly more than 4.0x. Nonetheless, the company's commitment to
de-leveraging, good liquidity, and the strength of the strategic combination
support the 'BBB-' ratings.
Fitch has factored into the ratings ConAgra's commitment to prioritize its
free cash flow (FCF) for debt reduction within 18 to 24 months after the
transaction closes. Maintaining the current dividend level and very modest
share repurchases should support the significant debt reduction needed to
retain investment-grade ratings. Fitch believes ConAgra's target of
approximately $225 million in annual cost savings by the fourth full fiscal
year after the closing, driven by supply chain and SG&A efficiencies, will be
achievable, based on similar industry transactions. However, Fitch believes
the near-term benefit is likely to be outweighed by costs to achieve those
The acquisition of Ralcorp is in line with ConAgra's strategic growth
objective to increase its exposure to private label. The transaction has good
strategic rationale as both companies operate primarily in the center of the
store in complementary categories without significant overlap between branded
and private-label products. ConAgra will benefit from Ralcorp's higher margin
predominantly private-label portfolio. However, with both companies operating
primarily in the United States, this transaction does not broaden their
geographic exposure to faster growing markets. Both companies have recently
been highly acquisitive, and that is also taken into consideration for the
ratings. Material acquisitions are not anticipated until leverage is solidly
back in line with the rating level.
ConAgra is expected to maintain adequate liquidity, including a portion of its
cash balance, and a substantial part of its currently undrawn $1.5 billion
revolving credit facility that matures Sept. 14, 2016. The credit facility
provides backup to ConAgra's commercial paper (CP) program. Proceeds under
ConAgra's new $1.5 billion term loan are also expected to be used to fund the
Ralcorp acquisition. The term facility may be increased to up to $2 billion,
matures on the fifth anniversary of the acquisition closing date, and
amortizes 2.5% per quarter commencing on June 1, 2013. ConAgra does not plan
to draw on its $4.5 billion bridge facility.
All of ConAgra's credit facilities contain a leverage covenant that
accommodates the acquisition in the near term. Additionally, there is also a
spring-in guarantee in certain events. The existing revolver was amended on
Dec. 21, 2012 to harmonize with changes in the new facilities. The key change
to the leverage covenant was that consolidated funded debt must not exceed 75%
of the consolidated capital base for four quarters including the acquisition
quarter and 70% for the following four quarters before reverting to the
original 65%. Further, if the company's debt is non-investment grade upon
closing then all material wholly owned domestic subsidiaries must guarantee
the obligations. The guarantees would be released when the company becomes
investment grade. The company is expected to remain in compliance with its
Upcoming long-term debt maturities are manageable. Fitch anticipates ConAgra
is likely to refinance and/or use cash to pay down part of its next
significant debt maturities, which are $500 million 5.875% notes due in April
2014 and $250 million 1.35% notes due Sept. 10, 2015.
What Could Trigger a Rating Action
Future developments that may, individually or collectively, lead to a negative
rating action include:
--If ConAgra's planned debt reduction falters significantly, which could occur
due to shortfalls in earnings/cash flow, such that leverage (total
debt-to-operating EBITDA) remains at or above the mid-3.0x range.
Future developments that may, individually or collectively, lead to a positive
rating action include:
--A positive rating action is not anticipated in the near term. Beyond this
timeframe, a positive rating action could be supported by substantial and
growing FCF generation, along with leverage consistently in the mid-2x range.
--Maintenance of conservative financial policies, such as publicly stating
that the company's financial strategies no longer include large acquisitions
that require substantial debt financing, could also support an upgrade.
Fitch currently rates ConAgra as follows:
--Long-term Issuer Default Rating (IDR) 'BBB-';
--Senior unsecured notes 'BBB-';
--Credit facilities 'BBB-';
--Subordinated notes 'BB+';
--Short-term IDR 'F3';
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. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Judi M. Rossetti, CPA/CFA, +1-312-368-2077
70 W. Madison Street
Chicago, IL 60602
Grace Barnett, +1-212-908-0718
Michael Zbinovec, +1-312-368-3164
Brian Bertsch, +1 212-908-0549 (New York)
Press spacebar to pause and continue. Press esc to stop.