Fitch Affirms Kellogg's IDR at 'BBB+', Rates Euro CP 'F2'; Outlook Positive.

CHICAGO -- Fitch Ratings affirms Kellogg Company (Kellogg) and subsidiary ratings as follows:

Kellogg Company

--Issuer Default Rating at 'BBB+';

--Senior unsecured debt at 'BBB+';

--Bank credit facility at 'BBB+';

--Commercial paper at 'F2'.

Kellogg Europe Company Limited (KECL)

--Issuer Default Rating at 'BBB+';

--Senior unsecured debt at 'BBB+'.

Concurrently, Fitch assigns the following ratings:

Kellogg Europe Company Limited

--Commercial paper 'F2'.

Kellogg Holding Company Limited

--Issuer Default Rating 'BBB+';

--Commercial paper 'F2'.

The Rating Outlook remains Positive. Total debt at Dec. 30, 2006 was $5 billion.

On Jan. 31, 2007, Kellogg and two of its subsidiaries, Kellogg Europe Company Limited (KECL) and Kellogg Holding Company Limited (KHCL), established a Euro commercial paper (Euro CP) program. Euro CP notes may be issued up to a maximum of US$750 million or equivalent in alternative currencies. The notes may be denominated in Euros, U.S. Dollars, Yen, Sterling or any other currency subject to compliance with any applicable legal and regulatory requirements. Notes issued by KECL or KHCL will be guaranteed by Kellogg.

KECL also announced on Jan. 31, 2007 that it exercised its right to call for early redemption the EUR550 million guaranteed Floating-rate notes due May 2007 (Euro notes). The Euro notes will be redeemed effective Feb. 28, 2007.

In addition, on Jan. 31, 2007, Kellogg entered into an unsecured $400 million 364-day credit agreement. This agreement is in addition to its $2 billion five-year credit agreement dated Nov. 10, 2006. Commercial paper outstanding at Dec. 30, 2006 was $1.3 billion.

Kellogg's ratings incorporate its leading market share positions, strong brand equity and consistency in operating earnings. The ratings are also supported by the company's clear and balanced financial strategy, as well as its high level of liquidity. Cash flow from operations strengthened significantly in 2006 to $1.4 billion, largely as a result of the curtailing of large benefit plan contributions during 2003-2005. Free cash flow (after dividends and capital expenditures) of $507 million was primarily utilized for net share repurchases of $432 million. Fitch expects net share repurchases to remain the predominant use of free cash flow.

Net sales growth (excluding currency impact) in 2006 continued at a strong pace of 6.8%, comprised of 3.1% volume growth and 3.7% price/mix. However, operating profit growth was not as strong. Excluding a 3.7% impact from expensing stock options under SFAS 123R, operating profit grew 4.6%. While Kellogg's margins are still among the highest in the packaged foods sector, gross margins for the full year fell 70 basis points (bp) to 44.2%. Kellogg could not entirely offset incremental fuel, energy, commodity and benefits costs despite cost reduction initiatives that lessened the impact. These costs are pervasive across the packaged food industry. In 2007, Kellogg expects gross margin pressure to continue, particularly due to high costs for grains and edible oils. However, the company still intends to meet its mid-single digit operating profit growth goal.

The Positive Rating Outlook continues to reflect the company's credit measures, which are slightly better than typically required for the rating category. Fitch estimates that total debt-to-operating EBITDA was 2.3 times (x) for 2006, operating EBITDA to gross interest expense was 7.2x and FFO adjusted leverage was 3.2x. Fitch expects cash balances to rise and credit metrics to remain fairly steady in the near to intermediate term, despite ongoing cost pressures. However, if cost pressures grow substantially beyond the company's current estimate of 50 basis points gross margin contraction in 2007, the Outlook may be revised to Stable. Conversely, if credit metrics improve slightly despite cost pressures or bolt-on acquisitions, an upgrade could occur.

Kellogg manages a portfolio of ready-to-eat (RTE) cereals, cookies, crackers, snacks, and other branded packaged food products. Kellogg holds either the #1 or #2 leading market share positions in all the major categories in which it competes. Key brands include Frosted Flakes, Special K, Apple Jacks, Keebler, Kashi, Nutri-Grain, Pop-Tarts, Eggo, and Cheez-It.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.