Moody’s Investors Service Inc. has assigned Baa2 ratings with a negative outlook to $3.975 billion of senior unsecured debt from ConAgra Foods, Inc.
The debt was issued in connection with the pending acquisition by ConAgra Foods of Ralcorp Holdings, Inc., for $6.8 billion. Moody’s said additional sources of funding for the acquisition will be $269 million from a recent common stock offering, $750 million of Ralcorp debt being assumed through a pending exchange offer, and a $1.5 billion five-year senior unsecured term loan facility arranged in December 2012.
While the Baa2 rating is supported by a diversified portfolio of food products at ConAgra Foods, solid cash flow and the company’s large scale, the rating is constrained by “weakened credit metrics that will result from the pending Ralcorp acquisition and by the limited strength of its portfolio of mostly middle-tier brands,” Moody’s said.
“The negative rating outlook reflects material deterioration of ConAgra’s credit profile that will result from the proposed leveraged transaction,” the agency said. “Moody’s expects that the company will be able to restore credit metrics to levels appropriate for the Baa2 rating in approximately 18 months, barring any major integration challenges.”
While ConAgra Foods has said the transaction would be closed before the end March, Moody’s said an earlier close was possible since financing is in place, and the transaction has already received U.S. and Canadian regulatory approval. Ralcorp shareholders will vote on the sales on Jan. 29.
With $18 billion in total sales, ConAgra Foods, when combined with Ralcorp, will be North America’s third largest food business, lagging only Nestle and Kraft Group.
“A rating downgrade could occur if ConAgra is not able to restore retained cash flow to net debt to above 14% within 18 months from the close of the Ralcorp acquisition,” Moody’s said. “An upgrade is not likely within the next two years; however, if retained cash flow to net debt can be sustained above 20% and EBITA margin approaches 12%, Moody's could consider an upgrade.”
