Moody's considering downgrade of Kellogg debt

by Josh Sosland
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NEW YORK — Moody’s Investors Service has assigned an A3 rating to $500 million of five-year senior unsecured notes issued Nov. 14 by Kellogg Co. At the same time, Kellogg has placed the rating under review for a possible downgrade. Moody’s began a review of the Kellogg long-term ratings Nov. 4.

Moody’s said proceeds from the notes are expected to be used primarily to reduce outstanding commercial paper.

The Nov. 4 review followed a Kellogg Co. announcement of operating results that were weaker than anticipated, Moody’s said. The financial results were adversely affected by a major accelerated spending plan to refurbish the company’s supply chain, prompting Kellogg to lower earnings guidance both for 2011 and 2012.

Moody’s said its review will include a look into the supply-chain challenges the company is confronting in its production plants as well as an evaluation of the steps Kellogg is taking.

“Moody’s will also reassess the future growth and profitability prospects of the global ready-to-eat cereal category in each of Kellogg’s key geographies, including North America, Europe and Asia,” the agency said. “Finally, the review will consider Kellogg’s financial policy as it relates to shareholder distributions, which Moody’s has previously warned may be too aggressive at the A3 rating category, considering the company’s recent earning volatility.”

To sustain an A3 rating from Moody’s, the agency said it needs to see a “clear path” back to stable operating results and a “moderation of financial policy.”

“Otherwise, Moody’s could change the outlook to negative or downgrade the ratings,” Moody’s said. “Given Kellogg’s recent operating challenges and weakening credit metrics, a rating upgrade is not likely in the foreseeable future. But over the longer term, ratings could be upgraded if retained cash low/net debt reaches at least 24% and debt to EBITDA is comfortably below 2.5 times.”

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