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Rating Action:

MOODY'S DOWNGRADES HEINZ' SENIOR UNSECURED DEBT TO A3 FROM A2; OUTLOOK NEGATIVE

23 Jan 2002
MOODY'S DOWNGRADES HEINZ' SENIOR UNSECURED DEBT TO A3 FROM A2; OUTLOOK NEGATIVE

Approximately $5.5 Billion of Debt Securities Affected.

New York, January 23, 2002 -- Moody's Investors Service today downgraded the long term and short term senior unsecured ratings for H.J. Heinz Company, as well as several of its guaranteed subsidiaries, to A3 and Prime-2 from A2 and Prime-1 respectively. Moody's also downgraded the preferred stock of H.J. Heinz Finance Company from Baa1 to Baa2. This action follows Heinz' higher leverage and weaker-than-expected operating performance in several of its US and international operations. It also anticipates that it will take Heinz some time to improve its financial profile. This comes at a difficult time for the company because Heinz has increased leverage and reduced its financial flexibility in recent years as it has pursued restructurings, leveraged acquisitions, and in earlier years, share repurchases. Heinz' ratings continue to be supported by its strong diversified portfolio of domestic and international brands, its solid market shares, and its good internal cash flow. The negative rating outlook reflects the difficult job Heinz faces in trying to improve operating performance at several of its challenged businesses, as well as improve its working capital management. Should such challenges further delay improvement in earnings and reduction in leverage, or should Heinz pursue additional acquisitions or share repurchases prior to strengthening its financial profile, its ratings could be further downgraded. This action concludes the review commenced on 11/12/01. Ratings downgraded are as follows:

H.J. Heinz Company

Senior unsecured to A3 from A2

Senior unsecured shelf to (P)A3 from (P)A2

Senior unsecured backed IRBs to A3 from A2

Short term rating to Prime-2 from Prime-1

H.J. Heinz Finance Company

Senior unsecured debt to A3 from A2 under a full guarantee of H.J. Heinz Company

Short term rating to Prime-2 from Prime-1 under a full guarantee of H.J. Heinz Company

Preferred Stock to Baa2 from Baa1

H.J. Heinz BV

Senior unsecured debt to A3 from A2 under a full guarantee of H.J. Heinz Company

Short term rating to Prime-2 from Prime-1 under a full guarantee of H.J. Heinz Company

H.J. Heinz Finance UK PLC

Senior unsecured to A3 from A2 under a full guarantee of H.J. Heinz Company

Short term rating to Prime-2 from Prime-1 under a full guarantee of H.J. Heinz Company

H.J. Heinz Company of Canada Limited

Short term rating to Prime-2 from Prime-1 under full guarantee of H.J. Heinz Company

Heinz announced in November 2001 that it was facing challenges in several of its operating segments, which -- despite recent acquisitions -- would result in declining operating performance for FY 2002. This includes a decline in Heinz' highly-profitable US foodservice business, where ketchup volumes declined in the softening economy. It was also caused by higher-than-expected supply chain costs in Australia, New Zealand and Japan as Heinz had difficulty executing a restructuring in that region. Heinz has replaced management in that region, and will continue to work to improve efficiencies in that operation. The company's canned pet food business continues to face challenges for which there is no easy remedy. And, while Heinz' tuna business is generating much better profits than last year, management will be challenged to generate continuing strong performance in its higher-margin pouch tuna business sufficient to make its overall tuna operation an attractive investment.

Moody's recognizes the good performance that Heinz has shown in other parts of its business. For instance, Heinz continues to hold a very strong position in the US retail ketchup category, with market share now exceeding 55%. Heinz has been successful in growing its line of Boston Market and Smart One's frozen food products, as well as a growing line of pet treats. The company has also succeeded in developing innovative new products -- such as green and purple ketchup and pouch tuna -- which have spurred sales of some very mature products.

Heinz disappointing operating performance comes at a difficult time, as the company has increased leverage and reduced its financial flexibility in recent years. Since 1997 Heinz has pursued three major restructuring initiatives that have resulted in over $2.3 billion in related charges and implementation costs. Management has publicly stated that it will pursue no more umbrella restructurings. Regardless, the continuing difficulties Heinz faces in Australia, New Zealand, and Japan, as well as in its pet food operation, highlight the challenge of turning around some of these operations. This raises the risk that achieving the full benefit of past restructuring actions may take longer and cost more than expected. Moody's also notes that the 2001 creation of H.J. Heinz finance adds increasing complexity to the company's financial structure.

In addition to restructurings, over the past 30 months, Heinz has made over $2 billion in acquisitions, partially offset by $909 million in divestitures. This includes $805 million spent on acquisitions in the six months ended 10/31/01. Yet throughout this period of material change, Heinz has continued to pay a high cash dividend of over $500 million annually -- representing one of the highest payouts in the industry. Together, these factors have resulted in a continuous increase in Heinz' debt and reduction of financial flexibility over the past few years. Retained cash flow to debt of less than 14% is weak for Heinz' A3 rating. However, Moody's expects Heinz to work to reduce debt and improve financial flexibility in the years ahead. Should Heinz be unable to improve operations, reduce debt, and improve its financial flexibility, its ratings will come under further downward pressure.

Moody's notes the relatively short term composition of some elements of Heinz' capital structure. This includes the company's $1 billion in dealer remarketable notes which carry a 20-year stated maturity, but can be put back to the company annually by investors. As a result, Moody's views these as relatively short term debt securities. Should these securities be put back to the company, Heinz could find its financial flexibility strained as it seeks to replace this funding. The current rating level assumes that Heinz maintains at all times sufficient high quality alternate liquidity to back both its commercial paper and is dealer remarketable notes.

H.J. Heinz Company, headquartered in Pittsburgh, PA, is a leading branded food and foodservice company.

New York
Angela Jameson
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Peter H. Abdill, CFA
VP - Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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