Fitch Ratings has assigned a 'BBB-' to ConAgra Foods Inc's. (Conagra) new $1.5 billion five-year senior unsecured term credit facility (term facility) and $4.5 billion 364-day bridge credit facility (bridge facility). On Dec. 27 and 28 ConAgra filed or announced a series of corporate actions associated with financing its acquisition of Ralcorp Holdings, Inc. (Ralcorp). The $6.8 billion acquisition, which included assumed debt, was expected to be predominantly debt-financed.
Specifically, on Dec. 27 the company filed that on Dec. 21, 2012 it had established the $1.5 billion unsecured term loan and the $4.5 billion unsecured 364-day bridge facility and also amended its current $1.5 billion revolving credit agreement. On Dec. 28, 2012 the company also announced an exchange offer for up to $750 million in Ralcorp notes.
Pursuant to the exchange offering, Fitch expects to rate ConAgra senior unsecured notes issuance (new notes) 'BBB-'. Fitch's ratings of ConAgra's debt are listed below.
The new notes will rank equal to the company existing senior unsecured indebtedness. The securities will be exchanged for any and all of Ralcorp Holdings, Inc. (Ralcorp) existing 4.950% notes due Aug. 15, 2020 for up to an aggregate principal amount of $300 million and for its existing 6.625% notes due Aug. 15, 2039 up to an aggregate principal amount of $450 million. The new notes are expected to be issued with identical interest rates and maturity terms as the Ralcorp notes. The early tender offer exchange date for the existing Ralcorp notes is Jan. 14, 2013; the expiration date is Jan. 29 2013
Proceeds under the bridge and term facilities are expected to be used to fund the company's acquisition of Ralcorp Holdings, Inc. (Ralcorp). The term facility may be increased to up to $2.0 billion, matures on the fifth anniversary of the acquisition closing date, and amortizes 2.5% per quarter commencing on June 1, 2013. Fitch anticipates that the company will refinance any borrowings under the bridge facility.
The bridge and term loan have similar requirements as the revolver but loosens the leverage covenant to accommodate 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 covenants.
The acquisition is expected to close by March 31, 2013, pending Ralcorp's shareholders' and regulatory approvals. 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 commercial/foodservice markets.
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, factoring in the use of a portion of ConAgra's $476.8 million cash at Nov. 25, 2012. 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 transactions. However, Fitch believes the near-term benefit is likely to be outweighed by costs to achieve those synergies.
The acquisition of Ralcorp is in line with ConAgra's strategic growth objective to increase its exposure to private label. Private label historically has grown faster than branded packaged food. 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. Acquisitions are not anticipated until leverage is solidly 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.
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 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 (total debt-to-operating EBITDA) consistently in the mid-2x range.
--Maintenance of conservative financial policies, such as publicly stating that its financial strategies no longer include large acquisitions that require substantial debt financing, could also support an upgrade.
Fitch currently rates ConAgra Foods, Inc. as follows:
--Long-term Issuer Default Rating (IDR) 'BBB-';
--Senior unsecured notes 'BBB-';
--$1.5 Revolving Credit Agreement 'BBB-';
--$1.5 billion 5 year senior unsecured term credit facility 'BBB-';
--$4.5 billion 364 day bridge credit facility;
--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