Fitch Affirms ConAgra's IDRs at 'BBB-/F3'; Outlook Stable

Fitch Ratings has affirmed the ratings for ConAgra Foods, Inc. (ConAgra) and its subsidiary, Ralcorp Holdings, Inc. (Ralcorp) as follows:

ConAgra Foods, Inc.

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

--Senior unsecured notes at 'BBB-';

--Bank credit facility at 'BBB-';

--Subordinated notes at 'BB+';

--Short-term IDR at 'F3';

--Commercial paper at 'F3'.

Ralcorp Holdings, Inc.

--Long-term IDR at 'BBB-';

--Senior unsecured notes at 'BBB-'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Leverage Reduction Modestly Slower than Expected: ConAgra's ratings reflect the company's elevated leverage following the Jan. 29, 2013 primarily debt-financed acquisition of Ralcorp for $6.8 billion, including assumed debt. Current leverage remains high for the rating level and slightly behind Fitch's expectations due to weak operating performance in its branded and private label business discussed below. Total debt to EBITDA was 3.8x for the latest 12 months (LTM) ended Aug. 24, 2014, operating EBITDA to gross interest expense was 5.9x, and funds from operations (FFO) adjusted leverage was 4.9x. The company's progress toward debt reduction, continued commitment to deleverage, ample free cash flow (FCF) generation and liquidity support the ratings. ConAgra has maintained its current dividend and kept share repurchases and acquisitions very modest in order to focus on debt reduction.

Expectations for Declining Leverage: Fitch estimates that ConAgra's leverage should decline to the low 3x level by the end of fiscal 2015 mainly through debt reduction combined with slight EBITDA improvement. If ConAgra falls short of this leverage reduction goal, Fitch anticipates that the company would continue to reduce debt to maintain leverage near 3.0x or below. ConAgra is prioritizing its FCF to repay approximately $2 billion of debt since the Ralcorp deal closed through fiscal 2015. The company has completed approximately $1.5 billion debt reduction so far, including about $400 million in fiscal 2013, $600 million in fiscal 2014 and $500 million through the first quarter of fiscal 2015. Fitch estimates that the remainder of the debt reduction should be completed from FCF this fiscal year. The first quarter debt reduction was from Ardent Mills joint venture net after tax proceeds of approximately $530 million. ConAgra contributed its flour milling business, which generated approximately $1.8 billion annual sales, in exchange for a 44% equity interest in Ardent Mills in May 2014.

Improving Operations Support Outlook: The ratings and Outlook factor in gradual improvement in operating performance in each segment in fiscal 2015. Fitch is looking for the company to achieve annual sequential improvement to flat volume this fiscal year in Consumer Foods, versus a three percent volume decline in fiscal 2014. This factors in volume improvement in core brands including Healthy Choice, Chef Boyardee and Orville Redenbacher, which struggled in fiscal 2014, along with expansion in faster growing channels. The company also expects Private Brands to improve volume, sales and profit this fiscal year after substantial deterioration in the previous year. ConAgra will be lapping price concessions in Private Brands, and has fixed service and execution issues. In the Commercial Foods segment ConAgra expects lower costs with a more normal potato crop beginning this quarter, versus weather-reduced yields last year. The company will also lap the loss of a significant foodservice potato customer, most of which has been replaced with new business.

Synergies Achievable: ConAgra expects to generate Ralcorp-related annual pre-tax cost savings of $300 million by the end of fiscal 2017, driven by supply chain and other efficiencies. The savings seem achievable based on other industry transactions. The company plans to make meaningful progress on Ralcorp related productivity and synergies in fiscal 2015 estimated at $125 million to $150 million, mostly driven by procurement. Nonetheless, profitability in this segment will be below Fitch's and the company's original expectations over the next few years, as reflected by the $605 million goodwill impairment taken in fiscal 2014.

Private-Label Scale is Long-Term Positive: ConAgra is one of the largest packaged food companies in North America, with $16 billion annual net sales. In addition to a sizeable branded food presence, ConAgra should benefit over the long term from greater private-label scale, as $4.2 billion annual sales makes it the largest private-label food producer in the U.S. ConAgra intends to capitalize on the favorable trends in private-label growth over the long term, after resolving recent service-related issues.

Ample Liquidity, Manageable Maturities: ConAgra maintains an undrawn $1.5 billion revolving credit facility expiring Sept. 14, 2018 that provides backup to its commercial paper (CP) program. The company had $545.2 million CP and $133.7 million cash, which was mainly outside the U.S., at Aug. 24, 2014. In the first quarter of fiscal 2015, the company repaid the $900 million balance on its term loan and terminated the facility. ConAgra also issued $550 million FRNs due in fiscal 2017 and purchased $500 million of its notes across various maturities. The revolving credit facility contains covenants that consolidated debt must not exceed 70% of consolidated capital during the first four quarters commencing Jan. 29, 2014, then 65% thereafter, and the company's fixed charge coverage ratio must be greater than 1.75x on a rolling four quarter basis. ConAgra's long-term debt maturities primarily consist of $1 billion due in fiscal 2016 and $550 million due in fiscal 2017.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

--If there is fundamental deterioration of ConAgra's ongoing revenues or operating earnings, or remaining leverage reduction does not occur, possibly due to shortfalls in cash flow due to lack of resolving the private label and/or core brand issues, such that leverage (total debt-to-operating EBITDA) remains at or above the mid-3.0x range.

Future developments that may, individually or collectively, lead to a positive rating action include:

--A positive rating action is not anticipated in the near to intermediate term due to the company's high acquisition related leverage and recent operational issues.

--In the long term, a positive rating action could be supported by substantial and growing FCF generation, consistent positive volume growth in all segments demonstrating that operational issues have been resolved, along with maintaining leverage in the mid-2x range.

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=931835

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