DBRS Rates Kellogg’s $1 Billion Senior Unsecured Notes Issue A (low)

DBRS has today assigned a rating of A (low) with a Stable trend to Kellogg Company’s (Kellogg or the Company) proposed issue of $1.0 billion 4.0% Senior Unsecured Notes (Notes) maturing December 15, 2020. Proceeds from the Notes are expected to be used primarily towards a voluntary pension contribution in 2010 of approximately $500 million, net of tax, and repayment of commercial paper issued to fund share repurchases during 2010. The impact of the transaction is modestly negative, related to higher debt levels, causing the financial profile, on a pro-forma basis, to be at the low end of the range. The Company’s strong business profile continues to underpin the A (low) rating based on Kellogg’s strong portfolio of brands, market position as the world’s largest cereal company, large scale and improving product and geographic diversification.

The Notes will be unsecured and unsubordinated obligations and will rank pari passu with all of Kellogg’s other unsecured and unsubordinated indebtedness. The Notes will be effectively subordinated to all liabilities of Kellogg’s subsidiaries, including trade payables. As of October 2, 2010, the Company’s subsidiaries had $105 million of indebtedness (including letters of credit).

The reduction of the Company’s underfunded pension plan and share repurchases will reduce Kellogg’s liquidity position and increase debt levels, which were previously expected to remain stable through 2010. On a pro-forma basis, debt-to-EBITDA is expected to rise slightly above 2.5 times at the end of 2010 compared to 2.1 times at the end of 2009. While DBRS does not consider underfunded pension liabilities as debt, we acknowledge the positive benefits that will result from the aforementioned contribution in the form of lower cash pension payments going forward.

While Kellogg is not expected to use cash flow for any meaningful debt reduction, DBRS expects the Company to limit share repurchases to a level that keeps key credit metrics within range for the current rating.

DBRS notes increased pressure on Kellogg’s operating results recently, stemming from supply chain disruptions, the cereal recall, higher than expected cost pressures and lower volumes levels.

Going forward, soft operating performance and/or aggressive financial management that would cause debt-to-EBITDA to increase meaningfully above 2.5 times for more than two consecutive quarters could result in a negative rating action.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Consumer Products, which can be found on our website under Methodologies.