Fitch assigns BBB ratings to ConAgra Foods' US$750M in senior unsecured notes; company intends to use net proceeds in part for repayment of commercial paper
September 11, 2012
– Fitch Ratings has assigned 'BBB' ratings to ConAgra Foods, Inc.'s (ConAgra) (NYSE: CAG) $250 million 1.35% senior unsecured notes due Sept. 10, 2015, $250 million 2.1% senior unsecured notes due March 15, 2018, and $250 million 3.25% senior unsecured notes due Sept. 15, 2022. ConAgra's total debt at May 27, 2012 was $2.9 billion.
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, 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 notes will be issued under the company's indenture dated Oct. 8, 1990. The indenture contains limitations on secured indebtedness and certain sale/leaseback transactions; however, there are no financial covenants or other restrictive covenants.
ConAgra intends to use the net proceeds for general corporate purposes, including the repayment of commercial paper (CP). Since ConAgra's CP was approximately $300 million as of Sept. 7, 2012, this transaction will increase total debt. This leverage increase can be accommodated within the current rating level.
ConAgra's credit ratings recognize the company's diversified product portfolio of branded and private label products and significant free cash flow (FCF) generation. The company has maintained low leverage for the rating level while engaging in several bolt-on acquisitions. ConAgra's positive rating factors are balanced with its modest international exposure, which may limit longer term growth due to the mature, though stable, nature of the packaged food business in the United States. ConAgra's margins remain below packaged food peers and it has had difficulty consistently maintaining operating earnings and volume growth.
ConAgra generated ample FCF (cash flow from operations minus capital expenditures and dividends) of $324 million in fiscal 2012, down from $499 million in the prior year primarily due to higher pension contributions. ConAgra spent approximately $700 million on acquisitions and $350 million on share repurchases in fiscal 2012, which were primarily financed with internally generated funds. Fitch expects fiscal 2013 FCF in the mid-$300 million to mid-$400 million range based on the company's guidance of $1.2 billion to $1.3 billion cash flow from operations and $450 million capital expenditures. The company is likely to again use FCF for acquisitions and share repurchases. ConAgra does not intend to increase leverage for share repurchases. Bolt-on acquisitions could lead to a modest increase in leverage and still be within the rating category.
For the latest 12 months ended May 27, 2012, ConAgra's total debt-to-operating EBITDA was estimated at 2.0x, operating EBITDA-to-gross interest expense was 7.0x and Funds From Operations adjusted leverage was 3.1x. Leverage is low for the rating level but will increase modestly with this debt issuance. ConAgra will still have flexibility for bolt-on acquisitions, but the amount of room has lessened. ConAgra still plans to pursue growth through acquisitions, which could be large and are likely to be in private label, core adjacencies or outside the U.S.
ConAgra maintains strong liquidity, including $103 million of cash at May 27, 2012 and an undrawn $1.5 billion revolving credit facility that matures Sept. 14, 2016. The credit facility provides backup to ConAgra's CP program. It contains financial maintenance covenants requiring that the fixed charge coverage ratio must exceed 1.75 to 1.0 and consolidated funded debt must not exceed 65% of the consolidated capital base. The company is in compliance with its covenants. Upcoming long-term debt maturities are manageable, with the next significant maturity being $500 million 5.875% notes due in April 2014.
ConAgra's current ratings are as follows:
--Long-term IDR 'BBB';
--Senior unsecured notes 'BBB';
--Bank credit facility 'BBB';
--Subordinated notes 'BBB-';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook is Stable.
What Could Trigger a Rating Action:
Future developments that may, individually or collectively, lead to a positive rating action include:
--Substantial and growing FCF generation, along with leverage (total debt to operating EBITDA) consistently in the low-2x range and maintenance of conservative financial policies, such as refraining from large, debt financed acquisitions.
Future developments that may, individually or collectively, lead to a negative rating action or Negative Outlook include:
--If earnings or cash flow falter significantly or the company engages in a large, debt financed acquisition, such that leverage is consistently above 3.0x with no plan to reduce leverage.
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.
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