Fitch assigns BBB+ rating to General Mills' US$1B in senior unsecured notes; General Mills plans to use net proceeds to repay portion of its outstanding commercial paper

Nevin Barich

CHICAGO , January 29, 2013 (press release) – Fitch Ratings has assigned a 'BBB+' rating to General Mills, Inc.'s (General Mills) $1 billion in senior unsecured notes, including a $250 million three year floating rate note (FRN), a $250 million three year note and a $500 million 30 year note.

General Mills plans to use the net proceeds to repay a portion of its outstanding commercial paper (CP). The proposed notes contain a Change of Control Triggering Event. Upon the occurrence of both a Change of Control and rating downgrades to below investment grade, unless the company has exercised its right to redeem the notes, General Mills 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 repurchase. The notes will be issued under the company's indenture dated Feb. 1, 1996, as amended. The indenture contains limitations on liens and sale/leaseback transactions; however, there are no financial covenants.

SENSITIVITY/RATING DRIVERS:

General Mills' ratings and Stable Outlook incorporate the company's strong profitability, substantial internally generated liquidity and leading market positions in key categories. The company has important and defensible brand equity in major product categories such as cereal, yogurt, ready-to-serve soup and snacks. General Mills' margins are among the top tier in the sector, which provides ample financial flexibility. The company's credit strengths are balanced with its historically high priority for returning cash to shareholders.

The company's leverage remains adequate for the rating level following General Mills' primarily debt financed $940 million acquisition of Yoki Alimentos S.A. (Yoki) in August 2012. Consolidated total debt-to-operating EBITDA was 2.5x for the latest 12-month (LTM) period ended Nov. 25, 2012, operating EBITDA-to-gross interest expense was 9.9x, and funds from operations adjusted leverage was 3.3x. Fitch expects leverage to improve modestly within the rating category as Yoki's results continue to be consolidated. Fitch also anticipates that there will be room within the rating category for General Mills to pursue moderate share repurchase and/or bolt-on acquisition strategies.

General Mills' annual free cash flow (FCF) after capital expenditures and dividends averaged more than $650 million annually during the past five years. Year-to-date FCF was very strong at $619 million, and Fitch expects FCF to remain above average for the fiscal year. The company has historically utilized its sizeable FCF primarily for share repurchases but has shown discipline to pull back after acquisitions. Given the size of the Yoki acquisition, General Mills plans below-average share repurchases this year versus historical levels.

Input cost inflation had a negative impact on margins for most packaged food companies in fiscal 2012, including General Mills. Input costs have moderated in fiscal 2013 to approximately 3%, which has led to some margin improvement. Revenue growth in 2013 is expected to be in the mid-single-digit range and includes growth from both General Mills' established businesses and contributions from recent acquisitions. U.S. Retail sales have been negatively affected by declines in U.S. yogurt core (regular and light) cups and
under-representation in the fast-growing Greek yogurt segment. However, the company is slowly making improvement with many new products launched in fiscal 2013.

Overall liquidity is plentiful and refinancing risk is minimal due to significant FCF generation and undrawn credit facilities. The company maintains $2.7 billion of undrawn, unsecured committed credit facilities consisting of a $1 billion facility expiring in April 2015 and a $1.7 billion facility expiring in April 2017. The credit facilities contain a financial covenant that requires a ratio of earnings-to-fixed charges of at least 2.5:1. General Mills remains in compliance with its covenants.

Total debt was $8.6 billion at Nov. 25, 2012, including $1.9 billion of CP and $242 million of Class A Limited Membership interests. Upcoming maturities primarily consist of $700 million 5.25% notes due in August 2013, as well as $300 million 1.55% notes and $400 million floating-rate notes due in May 2014. Fitch expects that the company will likely to refinance these notes.

General Mills has a 51% controlling interest in Yoplait S.A.S. and consolidates the entity. However, General Mills does not guarantee this debt. Guarantees are provided by certain Yoplait S.A.S. subsidiaries that make up the vast majority of assets and income of the joint venture. Yoplait S.A.S.'s alignment with General Mills' core business, its strategic importance and significant investment all support alignment of the ratings with General Mills' ratings. This credit facility is structurally superior relative to the cash flows, but it is a very modest portion of General Mills' capital structure. The facility has financial covenants including that total net debt-to-EBITDA shall not exceed 3.00:1.00 and EBITDA-to-net cash interest shall not be less than 7.00:1.00. Sodiaal, a French dairy cooperative, holds the remaining interests in each of the Yoplait international entities and has the option to put a limited portion
of its $877.6 million redeemable interest in Yoplait S.A.S. to General Mills once per year for nine years. If those payments are necessary, Fitch expects General Mills to finance them with FCF or modest borrowing.

What Could Trigger A Rating Action

Future developments that may, individually or collectively, lead to a positive rating action include:

A ratings upgrade in the near-to-intermediate term is unlikely but could occur if the company commits to maintain leverage (total debt to operating EBITDA) in the low 2x range while generating consistency or growth in FCF.

Future developments that may, individually or collectively, lead to a negative rating action include:

If the company engages in a significant debt-financed acquisition or share repurchase program, or operating earnings and margins come under severe pressure, resulting in a sustained period of leverage greater than 3.0x and weakening FCF.

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