CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to General Mills, Inc.'s (General Mills), issuance of EUR900MM senior unsecured notes (EUR500 million due in 2023 and EUR400 million due in 2027).
The company plans to use the net proceeds for general corporate purposes including the repayment of commercial paper (CP). The notes rank pari passu with General Mills' other senior unsecured debt and contain a Change of Control provision at 101. The notes are issued under the company's indenture dated Feb. 1, 1996.
The Rating Outlook is Stable.
A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
Leverage Temporarily High: Fitch estimates that General Mills' fiscal 2015 leverage (total debt-to-operating EBITDA) will be near 3x, factoring in the $822 million debt-financed Annie's acquisition in October 2014. The company has also completed $1.2 billion in share repurchases year to date through February 2015, a portion of which were debt financed. Consolidated total debt-to-operating EBITDA was 3.2x, operating EBITDA-to-interest expense was 9.8x and funds from operations (FFO) adjusted leverage was 4.4x for the latest 12 months ended Feb. 22, 2015. Fitch anticipates that leverage has peaked and should decline modestly in fiscal 2016 with EBITDA growth, and leverage in fiscal 2017 and beyond should be back in the mid-2x range. Fitch expects General Mills may pull back on share repurchases if operating earnings improvement remains elusive, to return leverage to these levels. During the fiscal fourth quarter of 2015, the company approved a one-time repatriation of approximately $600 million of foreign earnings that Fitch believes will be utilized for debt reduction and funding cash restructuring charges (discussed below). Cash income taxes related to the repatriation are approximately $15 million to $25 million.
Strong Margins, Liquidity, Brands: General Mills' ratings incorporate the company's strong profitability, substantial internally generated liquidity, and leading market positions in key categories. Fitch considers General Mills to have one of the best product portfolios in the industry, with strong brand equities and marketing expertise in large categories that span a variety of meals and snacks. The company maintains significant brand equity in major product categories including cereal, yogurt, ready-to-serve soup, and snacks. Although they have recently been under pressure, margins are generally among the sector's top tier. Credit strengths are balanced with General Mills' high priority for returning cash to shareholders.
FCF Lower, but Still Significant: General Mills' annual free cash flow (FCF; cash flow from operations less capital expenditures and dividends) averaged approximately $850 million during the past five years. The company generally utilizes its FCF as well as debt funding as it did in fiscal 2014 and 2015 for share repurchases. The company has historically shown discipline to pull back on share repurchases after significant acquisitions. Near-term annual FCF will be below the historical average due to weaker operating performance in 2015 and cash restructuring charges announced to date of $260 million split across fiscal 2015 and 2016. Fiscal year-to-date cash restructuring charges were approximately $40 million. Meaningful cost synergies of $260 million to $280 million in fiscal 2016 could more than offset the cash charges.
Operating Improvement Anticipated: There is little headroom in the ratings for additional operating underperformance without commensurate debt reduction. The company has incurred weak industry trends and higher merchandising expense in U.S. Retail, its largest segment. Fitch believes the company's plans for more product innovation, continued focus on brand renovation and capitalizing on consumer trends will accelerate growth in its U.S. Retail business, which comprises 59% of net sales and 75% of segment operating profit. However, the operating environment remains difficult across mature markets. Annie's approximately $200 million annual sales are not material to General Mills overall. However, Annie's contributes scale in the higher growth natural and organic category where General Mills now has more than $600 million annual net sales.
Ample Liquidity: The company maintains $2.7 billion of undrawn committed credit facilities that support its CP program, consisting of a $1 billion facility expiring in May 2019 and a $1.7 billion facility expiring in April 2017. In addition, Yoplait SAS has a EUR200 million revolver due in June 2019 that General Mills consolidates. General Mills had $2.8 billion available on its total of $2.9 billion committed facilities as of the most recent quarter end, with borrowings only on the Yoplait facility. Fitch views total debt at $10.5 billion at Feb. 22, 2015 including $1.7 billion CP and $251.5 million Class A Limited Membership Interests. Upcoming debt maturities consist of $750 million floating-rate notes and $250 million of 0.875% notes both due in January 2016. Fitch expects that General Mills will refinance near-term maturities. On March 17, 2015, the company repaid $750 million of notes at maturity with CP. The CP balance at March 17, 2015 was $2.2 billion.
KEY ASSUMPTIONS:
--Fitch believes that leverage has peaked, and should decline modestly in fiscal 2016 with EBITDA growth, and leverage in fiscal 2017 and beyond should be back in the mid-2x range.
--Low single-digit net sales growth for full-year fiscal 2015 and high single-digit net sales growth in the fiscal fourth quarter including the 53rd week, on a constant currency basis. Net sales from Annie's for six months since the acquisition are estimated at $120 million.
--Low single-digit decline in segment operating profit for the fiscal year, on a constant currency basis. Outer years grow at the low end of mid-single digits.
--$750 million capex in 2015 including the Yoplait China plant, snack bar capacity and capacity for fiscal 2016 new products.
--Fiscal 2015 cost savings include approximately $400 million from Holistic Margin Management (HMM) and $40 million from restructuring. Ongoing HMM savings continue and restructuring savings approach $300 million in fiscal 2017.
--FCF below historical average in 2015 results in share repurchases as noted above being partially debt financed. FCF improves over forecast period as cost savings ramp up and cash charges decline.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
--A negative rating action could occur if operating earnings remain under pressure and debt reduction does not occur, resulting in a sustained period of leverage (total debt-to-operating EBITDA) greater than approximately 3x and weakening FCF.
Future developments that may, individually or collectively, lead to a positive rating action include:
A ratings upgrade is unlikely in the near- to intermediate-term but could occur in the long term if the company commits to maintain leverage in the low 2x range while generating FCF at historical average annual levels or higher. A commitment to refrain from large debt-financed share repurchases or acquisitions would also support an upgrade.
Fitch currently rates General Mills and its subsidiaries as follows:
General Mills, Inc.
--Long-term Issuer Default Rating (IDR) 'BBB+';
--Senior unsecured debt 'BBB+';
--Senior unsecured credit facilities 'BBB+';
--Short-term IDR 'F2';
--CP 'F2'.
General Mills Cereals LLC
--Long-term IDR 'BBB+';
--Class A limited membership interests 'BBB+'.
Yoplait S.A.S.
--Long-term IDR 'BBB+';
--Credit facility 'BBB+'
--Senior unsecured debt 'BBB+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983216
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