Fitch, S.&P. take ratings actions on Campbell
July 13, 2012
by Eric Schroeder
CHICAGO — Fitch Ratings has downgraded several of Campbell Soup Co.’s ratings while Standard & Poor’s Ratings Services has placed many of the Camden, N.J.-based company’s ratings on CreditWatch with negative implications following the company’s July 9 agreement to acquire Bolthouse Farms in a $1.55 billion debt financed transaction.
In its July 10 ratings action, Fitch downgraded Campbell’s long-term issuer default rating (I.D.R.) to ‘A-‘ from ‘A’; its senior unsecured debt to ‘A-‘ from ‘A’; its senior unsecured credit facility to ‘A-‘ from ‘A’; its short-term I.D.R. to ‘F2’ from ‘F1; and its commercial paper to ‘F2’ from ‘F1.’ Fitch maintained its “stable” outlook for the company.
Fitch “A” ratings denote expectations of low credit risk, and the capacity for payment of financial commitments is considered strong.
“The downgrades reflect Campbell’s substantial increase in leverage for the acquisition, which is expected to close later this summer,” Fitch said. “Fitch estimates that initial pro forma leverage (total debt to EBITDA) will be in the high 2x range, which is well above the 1.6x — 1.8x leverage range Campbell’s has maintained over the past several years. The stable outlook reflects that debt reduction and modest EBITDA growth should bring leverage down to the low 2x range within 18 to 24 months of the transaction closing, which is comfortably in the ‘A-‘ rating category.”
Fitch said Campbell should be able to generate at least $350 million to $400 million in free cash flow annually for debt reduction.
Commenting on the acquisition, Fitch said the addition of Bolthouse “will expand Campbell’s healthy beverages platform into refrigerated beverages and provide a growth platform for other refrigerated snacks and simple meals, including chilled soup. The acquisition also provides modest diversification away from Campbell's declining U.S. soup business into faster growth packaged fresh foods at the coveted perimeter of the store.”
Fitch said Campbell’s overall profitability as measured by operating EBITDA margins is expected to remain among the best in the packaged food industry, and the ratings incorporate Campbell’s leading position in the high margin soup category and the strength of its branded product portfolio. The ratings also consider the mature and highly competitive nature of the soup category and Campbell’s prolonged underperformance, Fitch noted.
Meanwhile, S.&P. in a July 9 filing placed Campbell’s “A-“ long-term corporate credit rating and all long-term issue-level debt ratings on CreditWatch with negative implications, meaning S.&P. could lower or affirm the ratings following a review. The ratings agency did not put Campbell’s “A-2” short term and commercial paper ratings on CreditWatch because it said it did not believe that Campbell’s corporate credit rating would be lowered by more than one notch.
Ratings with a value of “A” generally indicate a strong capacity to meet financial commitments, according to S.&P.
Additionally, S.&P. put its “B” corporate credit rating on Bolthouse on CreditWatch with positive implications, meaning it may raise or affirm the ratings following a review. A “B” designation indicates a rating may be more vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.
“We believe the proposed acquisition would meaningfully increase Campbell’s debt obligations and weaken its credit protection measures,” said Bea Chiem, a credit analyst with S.&P. “Concurrently, we believe that Bolthouse’s credit profile will improve with the acquisition by the larger and financially stronger Campbell Soup Co.”