$3.6 billion of notes offered in exchange for parent company debt as part of spin-off plan
New York, July 16, 2012 -- Moody's Investors Service has assigned Baa2 long-term senior unsecured debt ratings to $3.6 billion of proposed senior unsecured exchange notes to be issued by Kraft Foods Group, Inc. ("Kraft Foods Group" or "KFG") on July 18th 2012 in connection with its planned spin-off by parent company Kraft Foods Inc. ("Kraft") to shareholders. The completion of this exchange offer will conclude the migration of $10 billion of debt from Kraft to KFG as part of the spin-off plan. The rating outlook is stable.
Kraft plans to distribute all the common stock of KFG to shareholders later this year in a tax free spin-off that will result in two separate publicly-traded entities: Kraft Foods Group, Inc., Kraft's North American grocery subsidiary, and Mondelez International, Inc., Kraft's global snacks business that will remain. Prior to the spin-off, Kraft will capitalize Kraft Foods Group with a total of $10 billion of debt, including $400 million of preexisting KFG debt, $6 billion of senior unsecured notes that were issued by KFG in June, and $3.6 billion of exchange notes that will be issued by KFG this week.
Kraft Foods Group's Baa2/Prime-2 ratings are supported by strong operating margins, stable earnings and cash flow, leading category market shares, and a broadly-diversified portfolio of branded packaged food products. These credit strengths are balanced against the company's high geographic concentration of revenues in the low-growth U.S. food industry, and Moody's anticipation of future operational challenges following the spin-off including inefficiencies related to fixed cost absorption and possible uneven sales performance due to a recent shift from an in-house to a brokered retail sales force for some of its customers. The rating also reflects external challenges the company will face including a sustained sluggish U.S. economy, intense category competition and high input costs.
(Offering amounts are based on the debt exchange offer launched June 18 as amended on July 2, and are subject to final allocations to be completed on or around July 18th, 2012)
Kraft Foods Group, Inc.
$1,032,429,000 of 6.125% senior unsecured notes due 2018 at Baa2;
$900,000,000 of 5.375% senior unsecured notes due 2020 at Baa2;
$880,520,000 of 6.875% senior unsecured notes due 2039 at Baa2;
$787,051,000 of 6.500% senior unsecured notes due 2040 at Baa2.
The rating outlook is stable.
Under the terms of the debt exchange offer launched June 18 as amended on July 2, Kraft Foods Group is offering a total of $3.6 billion of senior unsecured notes in four tranches: i) $1 billion of 6.125% KFG notes due 2018 in exchange for Kraft notes due 2018 ii) $900 million of 5.375% KFG notes due 2020 in exchange for Kraft notes due 2020; ii) $881 million of 6.875% KFG notes due 2039 in exchange for Kraft notes due 2031, 2037, 2038, and 2039; and $787 million of 6.5% KFG notes due 2040 in exchange for Kraft notes due 2040. The exchange offer will expire on July 16, unless extended, and the exchange notes will be issued two days later.
The long-term debt of KFG, including the proposed exchange notes, will be guaranteed by Kraft up until the time of the spin-off later this year. Thereafter, the guarantees will fall away and KFG will be the sole obligor. Any commercial paper issued by KFG prior to or after the spin-off will not be guaranteed by Kraft.
Proforma for the spin off, financial leverage at Kraft Foods Group is modest (Moody's adjusted debt/EBITDA is below 3.5 times) and liquidity is solid. Details of Kraft Foods Group's financial policy have not been disclosed, however, Moody's assumes periodic strategic acquisitions, a dividend payout rate of at least 60% of earnings, and limited share repurchase activity.
A rating upgrade could occur if Kraft Foods Group sustains stable operating performance and conservative financial policy, and debt/EBITDA falls below 3.0 times. A rating downgrade could occur if the company's operating performance weakens or financial policy becomes more aggressive such that EBITDA margins fall below 15% or debt/EBITDA approaches 4.0 times.
Proforma for the spin off, Kraft Foods Group generates approximately $18 billion in annual sales making it the world's third largest packaged foods company behind Nestle and PepsiCo. Its broadly-diversified portfolio of well-known branded packaged foods include Kraft macaroni and cheese, Oscar Mayer meats, Philadelphia cream cheese, Maxwell House coffee, Capri Sun beverages, Jell-O desserts and Miracle Whip salad dressing.
The principal methodology used in rating Kraft Foods Group was the Global Packaged Goods Industry Methodology published in July 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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Brian Weddington, CFA VP - Senior Credit Officer Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Peter H. Abdill, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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