January 15, 2013 / 10:02 PM / 5 years ago

TEXT - Fitch rates ConAgra notes 'BBB-'

Jan 15 - Fitch Ratings has assigned a 'BBB-' to ConAgra Foods Inc.'s
(Conagra) $3.975 billion senior unsecured notes consisting of $750 million 1.30%
notes due in 2016, $1 billion 1.90% notes due in 2018, $1.225 billion 3.20%
notes due in 2023 and $1 billion 4.65% notes due in 2043. These notes are part
of the financing of ConAgra's $6.8 billion acquisition of Ralcorp Holdings, Inc.
(Ralcorp), including assumed debt. The acquisition is predominantly
debt-financed, but ConAgra also plans to utilize $269 million proceeds from the
company's recent equity issuance and estimated cash and equivalents of $564
million at the acquisition closing. If the acquisition is not completed for any
reason by August 2013, ConAgra will be required to redeem the notes in a special
mandatory redemption. 

The notes will be issued under the company's indenture dated Oct. 8, 1990. The 
new notes will rank equal to the company existing senior unsecured indebtedness.
The indenture contains limitations on secured indebtedness and certain 
sale/leaseback transactions; however, there are no financial covenants or other 
restrictive covenants. The notes contain a Change of Control Offer. Upon the 
occurrence of both a Change of Control and rating downgrades below investment 
grade, unless ConAgra has exercised its right to redeem the notes or the 
conditions of the special mandatory redemption have occurred, 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 to the date of 
purchase. 

The acquisition is expected to close by March 31, 2013, pending Ralcorp's 
shareholders' approval. 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. 

KEY RATING DRIVERS:

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. 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 industry 
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. 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. 
Material acquisitions are not anticipated until leverage is solidly back 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. Proceeds under 
ConAgra's new $1.5 billion term loan are also expected to be used to fund the 
Ralcorp acquisition. The term facility may be increased to up to $2 billion, 
matures on the fifth anniversary of the acquisition closing date, and amortizes 
2.5% per quarter commencing on June 1, 2013. ConAgra does not plan to draw on 
its $4.5 billion bridge facility. 

All of ConAgra's credit facilities contain a leverage covenant that accommodates
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. 

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 (total 
debt-to-operating EBITDA) 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 consistently in the mid-2x range. 

--Maintenance of conservative financial policies, such as publicly stating that 
the company's financial strategies no longer include large acquisitions that 
require substantial debt financing, could also support an upgrade. 

Fitch currently rates ConAgra as follows: 
--Long-term Issuer Default Rating (IDR) 'BBB-'; 
--Senior unsecured notes 'BBB-';
--Credit facilities 'BBB-';
--Subordinated notes 'BB+';
--Short-term IDR 'F3';
--CP 'F3'.

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