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Campbell, General Mills Credit-Default Swaps Advance on Higher Food Prices

The cost to protect food companies from Campbell Soup Co. to General Mills Inc. is climbing as record global food inflation eats away at profits.

Credit-default swaps on Campbell’s debt increased to a record 70.8 basis points, according to data provider CMA. That’s up from as low as 31.9 basis points in March. Contracts on Yum! Brands Inc. jumped 13 basis points to 85.2, the highest since July, and those on General Mills Inc. gained 6.2 to 60.7.

Rising food prices squeeze earnings, putting pressure on the stock, according to Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. A sinking share price may make a company’s management “more aggressive with financial engineering,” such as by boosting the stock with large share buybacks that may hurt its credit profile, he said.

“If they can’t deliver on their earnings from operating performance, which is really what it’s all about, then they look to other measures,” Levington said. “From a creditor standpoint, it starts a troubling circular reference.”

Global food costs jumped 25 percent in December from a year earlier, reaching an all-time high, according to the United Nations. Countries probably spent at least $1 trillion on imports, with the poorest paying as much as 20 percent more than in 2009, the UN says. In the U.S., the largest exporter, retail food prices rose 1.5 percent last year and will gain as little as 2 percent in 2011, the Department of Agriculture estimates.

Lower Forecasts

Campbell, the world’s largest soup maker, based in Camden, New Jersey, cut its annual sales forecast in November to at least 1 percent for the year, compared with a previous target of at least 2 percent. Campbell has lowered its sales projections three consecutive years. Minneapolis-based General Mills, which makes Cheerios cereal and Progresso soup, reported second- quarter profit that missed analysts’ projections as costs of raw ingredients increased and discounts damped sales growth.

General Mills Chief Executive Officer Ken Powell raised some cereal prices in mid-November to make up for surging ingredient expenses. Powell has introduced items such as chocolate-flavored Cheerios to lure shoppers away from rival cereal makers Kellogg Co. and Ralcorp Holdings Inc., which have dangled promotional discounts to capture more sales.

It’s hard to pass on a lot of the price increases to consumers today, Levington said. “High unemployment and inflation rising on a variety of things make it very tough to pass on, unless you’re willing to give up market share, which tends to be much more problematic.”

Key Driver

Contracts protecting the debt of Wendy’s International Inc. declined 35 basis points to 261.5, CMA data show. Wendy’s/Arby’s Group Inc., the third-biggest U.S. hamburger chain, will explore a sale of the Arby’s brand, potentially unraveling a tie-up spearheaded by its largest investor more than two years ago, the Atlanta-based company said today in a statement.

“Despite Arby’s positive momentum, the reality is that the Wendy’s brand, given its relative size and scope, is the key driver of shareholder return, and we believe we should focus on the execution of the compelling growth opportunities at Wendy’s,” Chairman Nelson Peltz said in the statement. Peltz’s Trian Fund Management LP and its affiliates hold about 24 percent of Wendy’s/Arby’s common stock, according to the fast- food maker.

Yum, which owns the KFC and Taco Bell restaurant chains, said on Jan. 18 that it will sell its Long John Silver’s and A&W All-American Food restaurants. Credit-default swap contracts declined 0.4 basis point that day.

Markit CDX Index

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.6 basis point to a mid-price of 84.5 basis points as of 4:44 p.m. in New York, according to index administrator Markit Group Ltd.

The CDX index, which typically rises as investor confidence deteriorates and falls as it improves, is at the highest since reaching 84.9 basis points on Jan. 13.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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