Fitch Rates Kellogg's $750MM Notes 'A-'; Outlook Stable

The company intends to use the net proceeds of this issuance to repay a portion of its outstanding CP. The notes contain Change of Control Repurchase Event language. Upon the occurrence of both a Change of Control and ratings downgrades below investment grade, unless Kellogg exercises its right to redeem the notes, 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. The notes will be issued under a new indenture which contains limitations on liens and sale-leasebacks but does not contain financial covenants.

Kellogg's ratings incorporate its leading market share positions, strong brand equity and solid top-line and operating earnings growth on a currency-neutral basis. The ratings are also supported by the company's clear and balanced financial strategy, as well as its significant liquidity and high margins for the industry. Kellogg's liquidity includes $304 million of cash and cash equivalents and its committed unsecured credit facility expiring in November 2011 with no borrowings. This credit facility allows the company to borrow up to $2.0 billion and obtain $75 million letters of credit. This facility contains covenants that restrict subsidiary indebtedness, liens and sale-leasebacks, and requires an interest coverage ratio of no less than 4.0:1.0. Kellogg's next material long-term debt maturity is $1.4 billion 6.6% notes due in April 2011.

Net sales in the first quarter ended April 4, 2009 fell 2.7% to $3.2 billion, as compared to very strong 10% sales growth in the first quarter of 2008. First-quarter 2009 sales were generated from a 1.6% decline in volume, 5.8% improvement from price/mix, 0.8% from acquisitions, and 7.7% reduction from currency. Internal net sales, which exclude the impact of currency and acquisitions/divestitures, rose 4.2%. Operating profit declined 2.9% to $529 million, but rose 6.6% excluding the impact of currency and acquisitions. Free cash flow (after capital expenditures and dividends) was $42 million for the quarter, compared to $62 million in the first quarter of 2008. Fitch expects that the principal use of free cash flow will be for net share repurchases.

The company's total cost pressure is expected to moderate significantly, rising 4% in 2009 versus a 10% increase in 2008. Total debt-to-operating EBITDA was 2.3 times (x) for the last 12 months ended April 4, 2009; operating EBITDA to gross interest expense was 8.0x, and funds from operations (FFO) adjusted leverage was 4.4x. Fitch anticipates that Kellogg will execute its $650 million share repurchase authorization prudently in 2009 in order to maintain fairly steady credit metrics.

Kellogg's ratings are as follows:

Kellogg Company:

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

--Senior unsecured debt 'A-';

--Bank credit facility 'A-';

--Short-term IDR 'F2';

--CP 'F2'.

Kellogg Europe Company Limited:

--Long-term IDR 'A-';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

Kellogg Holding Company Limited:

--Long-term IDR 'A-';

--Short-term IDR 'F2';

--CP 'F2'.

For additional information see Fitch's special report dated March 26, 2009 titled 'What's in Store for U.S. Packaged Foods' on the Fitch Ratings web site at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

SOURCE: Fitch Ratings

Fitch Ratings, Chicago 
Judi M. Rossetti, CFA, CPA, 312-368-2077 
Wesley E. Moultrie II, CPA, 312-368-3186 
or 
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Email: cindy.stoller@fitchratings.com