Uptick to stable in Moody's rating outlook for Sara Lee

by Josh Sosland
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NEW YORK — Moody’s Investors Service on Feb. 25 affirmed the Baa1 long-term rating and Prime-2 short-term rating of Sara Lee Corp. At the same time, the ratings agency revised its rating outlook for Sara Lee to stable

Despite challenges from global economic weakness, Moody’s said it has revised its outlook for Sara Lee because of anticipated stable operating performance at the company.

Moody’s said Sara Lee will benefit from moderating commodity price inflation, lower working capital needs and reduced restructuring charges. Also baked into the outlook is Moody’s expectation Sara Lee will not resume large share repurchases in the near term.

From an operating perspective, Sara Lee’s North American segments are performing solidly while prospects are for continued weakness in the company’s international operations in the near term, especially in non-food businesses.

Ratings have been under pressure in recent years because of uneven operating performance, weak financial metrics, heavy restructuring charges and aggressive share repurchases, Moody’s said. The agency specifically cited the Sara Lee five-year transformation plan of 2005 intended to improve performance while reshaping the Sara Lee business portfolio.

"But execution slipped early in the plan," Moody’s said. "Two years ago, Sara Lee reduced the plan’s $810 million savings target and shelved its goal of a 12% operating margin by 2010, due to rising input costs, heavy competition and delays in closing divestitures."

Sara Lee has incurred more than $1 billion in restructuring charges under the five-year plan. The charges were in connection with the divestiture of business equating to 40% of pre-plan revenues. Sara Lee now expects up to $850 million in annual cost savings and improved operating margins because of the plan.

The rating action, which affected $3.2 billion in debt securities, was the first for Sara Lee since June 2006, when it was downgraded to Baa1 from A3.

The highest rating beneath an A, a Baa1 rating suggests the company is subject to moderate credit risk and is considered medium-grade potentially possessing "certain speculative characteristics," Moody’s said.

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