-- Northfield, Ill.-based Kraft Foods Inc. completed the pending spin-off transaction of its North American grocery business, Kraft Foods Group Inc.
-- Following the transaction the company changed its name to Mondelez International Inc.
-- We are affirming the ratings on Mondelez, including the 'BBB' long-term and 'A-2' short-term corporate credit ratings; the rating outlook is stable.
Rating Action On Oct. 2, 2012, Standard & Poor's Ratings Services affirmed its ratings on Mondelez International Inc.
(formerly known as Kraft Foods Inc.), including the 'BBB' long-term corporate credit, 'A-2' short-term corporate credit and commercial paper, and 'BBB-' senior unsecured debt ratings. The outlook is stable.
The ratings affirmation incorporates our expectation that following the spin-off of the North American grocery business, Kraft Foods Group Inc.
(KFG; BBB/Negative/A-2), Mondelez will reduce debt by an additional $2 billion within the next 12 months, resulting in $18 billion of unadjusted debt outstanding before the end of 2013. As a result, we expect Mondelez's credit measures will be consistent with indicative financial ratios ranges for a "significant" financial risk profile.
We estimate about $20 billion of total debt was outstanding at Mondelez as of Oct. 1, 2012.
The ratings on Mondelez reflect our assessment of the company's business risk profile as "strong" and financial risk profile as "significant." Key credit factors in our business risk assessment include its good market shares and position as one of the world's largest snack and beverage companies, with a portfolio of brands and international diversification, but relatively lower EBITDA margin within the highly competitive global packaged foods industry. The company's significant financial risk profile incorporates our belief that Mondelez's financial policies, including its past acquisition and share repurchase activity, are aggressive. These have led to still-high debt levels (pro forma for the expected additional $2 billion of debt reduction within the next year) and key credit measures which we expect to be within or on the weaker end of the indicative ratio ranges for a significant financial risk profile. These ratios include leverage--as measured by total debt to EBITDA--in the 3x to 4x range, and funds from operations (FFO) to total debt of 20% to 30% (all amounts include our standard adjustments).
The remaining snack business will comprise (the currently named) Kraft Foods Europe, Kraft Foods Developing Markets, and North American snacks and confectionery segments. The company will still have significant scale, with about $36 billion in estimated 2011 net sales, 44% of which originates from developing markets. The company will have eight billion-dollar brands, including Oreo, Nabisco and LU biscuits, Cadbury and Milka chocolates, Trident gum, Jacobs coffee, and Tang powdered beverages. Mondelez believes it holds the global No. 1 position in biscuits, chocolate, candy, and nuts, and the No. 2 global position in gum. Key competition in the fragmented and highly competitive global snack industry includes Nestle S.A. (AA/Stable/A-1+), PepsiCo Inc. (A/Stable/A-1), The Hershey Co. (A/Stable/A-1), Kellogg Co. (BBB+/Negative/A-2), and Mars Inc. (unrated). As a result of the spin-off, we believe that the company's commodity exposure will be more manageable, as we expect the company will have more flexibility to increase pricing to offset future commodity cost inflation given the category's short, frequent purchase cycles that typically respond well to merchandising. We believe Mondelez's ongoing productivity programs, together with favorable product mix, should expand gross margins, allowing for reinvestment in marketing and research and development. In addition to ongoing cost-saving initiatives, we believe revenue and cost synergy realization from the 2010 Cadbury acquisition, together with a restructuring program initiated in 2012, should improve margins over the near-to-intermediate term. As a result of KFG's recent debt offerings and migration/transfer of debt, we estimate that Mondelez's unadjusted debt levels following the spin-off of KFG will be approximately $20.2 billion, and we expect that debt will be reduced further to $18 billion within the next 10-12 months.
Our 2012 forecast assumptions include:
-- A mid-single-digit revenue increase in 2012, primarily resulting from international growth.
-- Adjusted EBITDA margin to be somewhat pressured by higher commodity, advertising, and pension costs that more than offset higher pricing and productivity improvements.
-- We exclude about $2.1 billion in planned restructuring and other one-time costs, including capital expenditures associated with facilitating the spin-off of the North American grocery business.
-- Capital expenditures somewhat above its average 3.4% of revenues during the past several years.
-- A moderate dividend payout.
-- No share repurchases or dividend increases.
-- Tuck-in acquisition funded with discretionary cash flows.
Our forecast and ratings have not incorporated any potential increased liability or higher contributions to the company's multiemployer pension plans. During 2011, Kraft's total contributions to multiemployer pension plans were $32 million, and they were $30 million in 2010. As of Dec. 31, 2011, Kraft disclosed that the only individually significant multiemployer plan that it participates in is the Bakery and Confectionery Union and Industry International Pension Fund. In January 2012, Hostess Brands, a significant contributor to this fund, filed for bankruptcy under Chapter 11 and stated that they plan to modify their labor agreements in order to emerge from Chapter 11 with a new cost structure. It is currently unclear what effect these actions will have on Mondelez. As of Dec. 31, 2010 (latest available information), this multiemployer plan was unfunded by approximately $5.4 billion. We will continue to monitor developments and implications on our ratings on Mondelez.
We believe Mondelez has "adequate" liquidity, and expect its sources of cash to be in excess of uses for the next 12 months. Our view of the company's liquidity profile incorporates the following assumptions:
-- We expect liquidity sources including cash ($4.6 billion at June 30, 2012), discretionary cash flow, and availability under its $4.5 billion revolving credit facilities (for general corporate purposes and commercial paper back-up) to exceed uses by 1.2x over the next 12 months.
-- We expect liquidity sources to continue to exceed uses, even if EBITDA were to decline by 15%, and without breaching the company's financial covenant test, as it currently has more than sufficient cushion.
-- We believe Mondelez has solid relationships with its banks and a generally satisfactory standing in the credit markets.
It is our opinion that the company's relatively stable cash flow characteristics will continue, despite a very competitive operating environment. Our liquidity assessment assumes that Mondelez will use its surplus cash to repay $2 billion of its $3.55 billion of 2013 debt maturities, of which $750 million is due in February, $1 billion due in May, and $1.8 billion due in October.
Our rating outlook on Mondelez is stable. We believe the company will continue generating good cash flow despite a competitive operating environment and weak global macroeconomic conditions. We also expect it to maintain leverage that would be in line with ratios indicative of a significant financial risk profile, including leverage of about 3.5x and FFO to total debt above 20%.
We could lower the ratings if credit measures weaken beyond our expectations from weakened operating performance or more aggressive financial policies, such as sizable debt-financed share repurchases. If we lower the rating to 'BBB-' we would lower the 'A-2' short-term corporate credit and CP ratings to 'A-3'.
An upgrade is unlikely in the near-to-intermediate term, given our belief that credit measures will remain close to expected levels. Mondelez would need to improve credit measures closer to levels at the lower end of the indicative ratios for an "intermediate" financial risk profile, which include leverage in the 2x to 3x range, and FFO to total debt of 30% to 45%, in order for us to consider an upgrade.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List Ratings Affirmed Mondelez International Inc. Corporate Credit Rating BBB/Stable/A-2 Senior Unsecured BBB- Commercial Paper A-2 Cadbury Holdings Ltd. Corporate Credit Rating BBB/Stable/--
Cadbury Schweppes U.S. Finance LLC
Senior Unsecured BBB-
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)