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Fitch downgrades Kraft and Cadbury

Kraft Foods Inc and Cadbury Plc saw their credit ratings slashed by ratings agency Fitch to the lowest investment grade after Kraft won Cadbury's backing for its $19.6 billion takeover bid.

Fitch said on Wednesday it had downgraded its issuer default rating on both companies one notch to BBB-.

Late Tuesday, rival ratings agency Moody's said Kraft's credit ratings would likely remain investment grade following the deal, but were under review for a possible downgrade.

Separately Standard & Poors said it would keep an A- long-term corporate credit on Kraft, creditwatch negative, and a BBB rating on Cadbury, creditwatch with “developing implications.”

In a statement Fitch said its downgrades “reflect the anticipated increase in financial leverage of the combined Kraft/Cadbury.”

The deal will result in Kraft paying 500 pence in cash plus 0.1874 of a new Kraft share for each Cadbury share. The cash portion of around $11.2 billion will be financed with debt.

Fitch said it expected the combined company's leverage to reduce to around 3 or 3.5 times EBITDA from 4 times within two years, through growth of earnings and repayment of debt through free cash flow.

“This level is considered commensurate with the 'BBB-' rating,” it said. (Reuters)