Fitch Affirms Kellogg's IDRs at 'BBB+/F2'; Outlook Revised to Stable

  Fitch Affirms Kellogg's IDRs at 'BBB+/F2'; Outlook Revised to Stable

Business Wire

CHICAGO -- May 1, 2013

Fitch Ratings has affirmed the following ratings for Kellogg Company (Kellogg)
and its subsidiaries:

Kellogg
--Long-term Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Bank credit facility at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper (CP) at 'F2'.

Kellogg Europe Company Limited
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--CP at 'F2'.

Kellogg Holding Company Limited
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--CP at 'F2'.

Kellogg Canada, Inc
--Long-term IDR at 'BBB+';
--Senior unsecured debt at 'BBB+'.

The Rating Outlook is revised to Stable from Negative. Kellogg's debt balance
was $7.9 billion at year end 2012, up from $6 billion in 2011 due to the
primarily debt financed $2.7 billion Pringles acquisition which closed in May
2012. The year-end debt balance factors in Kellogg's nearly $400 million debt
reduction since the Pringles acquisition.

KEY RATING DRIVERS:
The ratings affirmations and Outlook revision to Stable reflect that Fitch's
expectations for operating earnings improvement, combined with significant
debt reduction from free cash flow (FCF, cash flow from operations less
capital expenditures and dividends), should restore leverage to pre-Pringles
acquisition levels in the mid-2x total debt to EBITDA range in 2014. Kellogg's
leverage was 3.1x at year end 2012 and was modestly better than Fitch's
expectations. Kellogg has committed to continue to reduce debt in 2013 by
refraining from share repurchases beyond offsetting the dilution from stock
option exercises, in order to focus on debt reduction. This, in addition to
higher profitability, should result in improved credit protection measures in
the near term.

Kellogg's ratings incorporate its #1 and #2 market share positions, strong
brand equities, and ample liquidity. The company is diversified
geographically, with approximately 40% of 2012 sales generated outside of the
United States. However, Kellogg has significant exposure to slow-growing,
mature markets and currently modest exposure to faster growing emerging
markets.

Financial Performance:
In 2012 the company's revenues increased 7.6% as 6.5% in net acquisitions and
2.5% of internal growth (price/volume/mix) more than offset 1.4% of negative
foreign exchange translation. In 2013, Fitch anticipates gross margins will be
down slightly due to the lower margins of Pringles, but more benign cost
inflation of 5% should provide some relief on the cost side as most of the
inflation will be offset by cost savings projects. Kellogg adopted a new
method for accounting for pensions which resulted in a non-cash mark-to-market
charge of $452 million in operating profit. Fitch excluded this charge and
one-time costs related to the Pringles acquisition, resulting in EBITDA of
$2.6 billion in 2012 or a 3% improvement over a similar pro forma adjustment
to 2011's EBITDA of $2.5 billion. In 2013, despite a slight decline in gross
margins, increased sales from a full year of Pringles and organic growth
should result in a solid increase in EBITDA.

The company's ample free cash flow (FCF, cash flow from operations less
capital expenditures and dividends) was over $600 million in 2012 after
averaging just $400 annually during the past five years. The lower levels had
been influenced by substantial pension and post-retirement contributions.
Fitch estimates 2013 FCF will be approximately $450 million to $550 million
due to higher capital expenditures and dividends. However, this level of FCF
still supports the company's commitment to rapid deleveraging.

Kellogg repaid down its $750 million notes due in March 2013, and future debt
maturities are manageable. Upcoming debt maturities include CAD$300 million
notes issued by Kellogg Canada, Inc. (under a full parent guarantee) due in
2014, $600 million notes due in 2015, and notes totaling $1.3 billion due in
2016. Only the company's 2031 notes lack a change of control provision. With
$2 billion of revolving credit availability, high levels of free cash flow and
excellent access to the capital markets, the company's liquidity remains
considerable.

RATING SENSITIVITIES:
Future developments that may, individually or collectively, lead to a positive
rating action include:

--A positive rating action is not anticipated in the near to intermediate
term. However, it could occur with significant debt reduction beyond current
expectations following the Pringles acquisition, and a commitment to maintain
leverage in the low 2.0x range or lower, along with strong free cash flow.

Future developments that may, individually or collectively, lead to a negative
rating action include:

--A downgrade could occur if Kellogg's operating performance substantially
deteriorates from current expectations, or if debt reduction is significantly
slower than anticipated, resulting in leverage that is likely to be sustained
at approximately 3.0x or higher.
--A downgrade could also occur if Kellogg becomes very aggressive with share
repurchases or acquisitions.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).

Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790186
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Contact:

Fitch Ratings
Primary Analyst:
Judi M. Rossetti, CPA/CFA, +1-312-368-2077
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Grace Barnett, +1-212-908-0718
Director
or
Committee Chairperson:
Michael Zbinovec, +1-312-368-3164
Senior Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com
 
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