Fitch Removes Ralcorp from Watch Negative & Affirms 'BBB-/F3' Ratings; Outlook Stable

Fitch Removes Ralcorp from Watch Negative & Affirms 'BBB-/F3' Ratings; Outlook Stable | Bild: © ad-hoc-news

Ralcorp Holdings, Inc.

--Long-term Issuer Default Rating (IDR) at 'BBB-';

--Senior unsecured notes at 'BBB-';

--Bank credit facility at 'BBB-';

--Short-term IDR at 'F3'.

The Rating Outlook is Stable.

In connection with the Post spinoff transaction, Ralcorp received $900 million in cash and Fitch estimates that Ralcorp utilized approximately $800 million of these proceeds for the reduction of prepayable debt. Immediately following this debt reduction, Ralcorp's total debt was $1.96 billion and the company currently has no other prepayable debt at par. Ralcorp plans to liquidate its approximately 20% retained interest in Post, valued at roughly $180 million, over the next 12 months and utilize the proceeds for share repurchases or debt reduction.

Ralcorp has historically grown through acquisitions and continues to pursue private-brand acquisitions and share repurchases under its remaining five million share authorization. Fitch factors into the ratings that Ralcorp will be conservative with these strategies while leverage remains at or above the high end of the company's stated long term leverage (total debt to EBITDA) range of 2.5 to 3.0 times (x). Ralcorp's commitment to maintain leverage in that range provides support for the ratings to remain at the current level.

For the fiscal year ended Sept. 30, 2011, Ralcorp's consolidated total debt to operating EBITDA was 3.1x, FFO adjusted leverage was 3.8x and EBITDA to gross interest expense was 5.8x. Fitch estimates that Ralcorp's leverage will be near 3.0x for fiscal 2012 and trend lower as earnings grow. A negative rating action could occur if Ralcorp aggressively pursues acquisitions and share repurchases and/or if operating fundamentals deteriorate substantially so that leverage would be sustained in the mid-3x range or above for an extended period. A positive rating action is not anticipated in the near-to intermediate term.

Ralcorp generated base business sales growth of 9% for the quarter ended Dec. 31, 2011, primarily reflecting considerably higher pricing that the company implemented to partially offset heightened commodity costs. Despite the higher price levels, base business volume, excluding branded cereal, held up fairly well with flat volume for the latest quarter versus the year ago period. Ralcorp is currently facing significant raw material and freight cost headwinds, which the company estimates at 10-12% higher 'cost of good sold' in fiscal 2012 versus the prior year. This increase is on top of a 6% rise in fiscal 2011. Although Ralcorp plans to reduce costs and increase pricing selectively, margin pressure will be particularly pronounced in the first half of the fiscal year with some easing currently anticipated in the back half.

For the fiscal year ended Sept. 30, 2011, the stand-alone Ralcorp private label business generated approximately $3.8 billion sales, $520 million EBITDA (13.7% margin) and FCF of $240 million (6.2% margin). The $545 million acquisition of a private brand refrigerated dough business that closed Oct. 3, 2011 is expected to add more than $300 million of sales. FCF is expected to remain strong in fiscal 2012 but will be impacted by higher capital expenditures, in the range of $190 million to $210 million in total, driven by capital expenditures associated with the company's accelerated cost reduction (ACR) initiatives.

Ralcorp is the leading producer of private brand food products in the United States and a foodservice provider. The company maintains leading market share positions and scale across a broad variety of private label categories but lost the diversification and cash flow provided by the higher margin Post branded cereal business. Ralcorp will have lower EBITDA margins than the pre-spinoff average (including Post) of 16.4% generated in fiscal 2011. The company does not pay a dividend, and Fitch does not expect it to change this stance in the near term.

Ralcorp maintains adequate liquidity after the spinoff of Post, including approximately $130 million to $140 million cash and an undrawn $300 million revolver expiring July 27, 2015. The company also has full availability under its $110 million receivables securitization facility. Upcoming debt maturities are modest, with $10.7 million due in fiscal 2012 and $85.7 million due in fiscal 2013, which will make leverage reduction primarily dependent on earnings growth.

Ralcorp's $300 million notes due in 2020 and $450 million notes due in 2039 do not contain financial covenants, but do contain a change-of-control triggering event in conjunction with downgrades below investment grade. Its other notes contain a financial covenant that total debt-to-adjusted EBITDA may exceed 3.5x for four consecutive quarters but not be greater than 3.75x. Ralcorp's credit facilities contain financial covenants of minimum EBIT to consolidated interest expense of 3.0x and maximum total debt-to-EBITDA of 3.75x. Ralcorp is expected to remain in compliance with its debt covenants.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

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