Fitch Affirms Kellogg's IDRs at 'A-/F2'; Outlook Stable.

CHICAGO -- Fitch Ratings has affirmed Kellogg Company's (Kellogg) ratings as follows:

Kellogg Company

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

--Senior unsecured debt at 'A-';

--Bank credit facility at 'A-';

--Short-term IDR at 'F2';

--Commercial Paper (CP) at 'F2'.

Kellogg Europe Company Limited

--Long-term IDR at 'A-';

--Short-term IDR at 'F2';

--CP at 'F2'.

Kellogg Holding Company Limited

--Long-term IDR at 'A-';

--Short-term IDR at 'F2';

--CP at 'F2'.

The Rating Outlook is Stable. Total debt at the quarter ended July 4, 2009 was $5.3 billion, including $508 million of notes payable (primarily consisting of commercial paper).

Kellogg's ratings incorporate its leading market share positions, strong brand equity and solid top-line and operating earnings growth on a currency-neutral basis. The ratings are also supported by the company's clear and balanced financial strategy, as well as its ample liquidity and high margins for the packaged food industry. Approximately half of Kellogg's sales are in the cereal category, and this product concentration is also reflected in the ratings. Free cash flow (cash flow from operations less capital expenditures and dividends) has averaged approximately $425 million over the past four years, even with $451 million of pension and other post retirement contributions in 2008. Free cash flow is expected to be at least $500 million in 2009. On July 4, 2009, Kellogg's liquidity included $424 million of cash and cash equivalents and its undrawn committed unsecured five-year credit facility expiring in November 2011. This credit facility allows the company to borrow up to $2 billion and obtain $75 million letters of credit. It contains covenants that restrict subsidiary indebtedness, liens and sale-leasebacks, and requires an interest coverage ratio of not less than 4.0:1.0. Kellogg's next material long-term debt maturity is $1.4 billion 6.6% notes due in April 2011. Fitch expects that the company is likely to refinance this debt.

Net sales in the first half ended July 4, 2009 fell 3.1% to $6.4 billion, as compared to very strong 10.4% sales growth in the first half of 2008. First-half 2009 sales were generated from a 1.1% decline in volume, 4.5% improvement from price/mix, 0.5% from acquisitions, and 7% reduction from foreign exchange impact. Since nearly 40% of Kellogg's sales are from outside the U.S., the U.S. dollar's strength versus foreign currencies has reduced sales growth. Internal net sales, which exclude the impact of currency and acquisitions/divestitures, rose 3.4%. Year-to-date internal net sales growth is in line with the company's guidance of 3% to 4% for the year. Operating profit was relatively flat with a 0.7% increase to $1.1 billion, but rose 10%, excluding the impact of currency and acquisitions. Internal operating profit rose due to sales growth, as well as cost savings initiatives and the timing of advertising spending, which will shift more toward the back half of the year. Free cash flow (after capital expenditures and dividends) was $275 million for the first half, approximately even with the first half of 2008. Year-to-date Kellogg has not engaged in share repurchases. The company may execute share repurchases from its $650 million share repurchase authorization for 2009 during the remainder the year.

Kellogg's total cost pressure has moderated significantly. It is expected to rise 4% in 2009 versus a 10% increase in 2008. Kellogg is incurring higher costs for rice, packaging and factory inflation. Total debt-to-operating EBITDA was approximately 2.2 times (x) for the last 12 months ended July 4, 2009; operating EBITDA to gross interest expense was 8.2 times (x), and funds from operations (FFO) adjusted leverage was 4.1x. Total debt-to-operating EBITDA has remained relatively stable over the past four years despite significant headwinds in recent periods due to input cost inflation and foreign exchange. Fitch anticipates that Kellogg will execute its financial strategy to maintain relatively stable credit metrics over the next year, on a currency-neutral basis.

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.