Fitch Rates Coca-Cola's Proposed $2.5B Issuance 'A+'; Outlook Stable
by Business Wire
Fitch Ratings has assigned an 'A+' rating to The Coca-Cola Company's (Coca-Cola) proposed issuance of $2.5 billion of notes with maturities of two-, five-, and 10-years. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release.
The notes will be issued by Coca-Cola and will rank equally with the company's senior unsecured obligations. Coca-Cola will use the net proceeds from the offering to fund a $1.3 billion redemption of all of Coca-Cola Refreshments USA, Inc.'s outstanding 5.00% notes due 2013, 7.375% notes due 2014 and 4.25% notes due 2015, including redemption premiums, other outstanding indebtedness and for general corporate purposes.
The new notes are being issued under the company's existing indenture dated April 26, 1988. While the indenture's restrictive covenants include limitations on secured debt and sale and leaseback transactions, the prospectus for the new notes excludes those covenants. Coca-Cola is not bound by any financial covenants. The two-year floating-rate notes may not be redeemed prior to maturity. The five- and 10-year notes are callable by Coca-Cola subject to a make-whole provision. Coca-Cola had $32.6 billion of debt as of Dec. 31, 2012.
KEY RATING DRIVERS
Coca-Cola ratings are supported by its position as the world's largest global beverage company and the value of the Coca-Cola brand. Coca-Cola has 16 $1 billion brands, including Coca-Cola, Diet Coke, Sprite, Powerade, Minute Maid, and Dasani. Given the prominence of carbonated soft drinks (CSDs) in Coca-Cola's beverage portfolio, the ratings consider the multiyear decline in CSD volumes in the U.S. and modest CSD growth in other developed countries. However, this risk is mitigated by Coca-Cola's market strength in developing, high-growth geographies.
Coca-Cola's ratings reflect the company's ability to consistently generate considerable cash flow from operations (CFFO) and free cash flow (FCF). Coca-Cola has demonstrated good execution and resiliency with topline and cash flow growth driven by increasing volume, price/mix and improved operating expense leverage, despite persistent global macroeconomic pressure. Consequently Coca-Cola generated $10.6 billion and $3.3 billion of CFFO and FCF, respectively, for the year ended Dec. 31, 2012, after generating $9.5 billion and $2.3 billion for the year ended Dec. 31, 2011.
Fitch expects Coca-Cola's FCF to exceed $3 billion in 2013. Management continues to meet or exceed its long-term financial targets of 3%-4% worldwide volume and 6%-8% operating income growth. Moreover, Coca-Cola should continue capturing growth and increasing beverage per capita consumption outside of the U.S. as consumer sentiment improves and the global recovery progresses.
Fitch is concerned about the significant growth in Coca-Cola's commercial paper (CP) balance over the past year. CP reached $16.3 billion at the end of 2012 compared to $12.9 billion in 2011 and as a result represents approximately 50% of the firm's overall capital structure. Despite the company's strong liquidity and good market access, Fitch believes this level of CP could result in modestly higher financial risk over the longer term.
The growth in CP balances results from Coca-Cola's mismatch between its U.S. cash outflows and its significant international cash inflows which the company has been reluctant to repatriate. Coca-Cola maintains a comparable cash balance along with its committed bank lines to provide backup to its CP borrowings. At Dec. 31, 2012, Coca-Cola's liquidity position of $22.9 billion consisted of $13.5 billion of cash, $3.1 billion of short-term investments, and $6.3 billion of availability under its committed credit lines and revolving credit facility.
Coca-Cola has committed to $3 billion to $3.5 billion of net share repurchases in 2013, after repurchasing a net $3.1 billion in 2012, but has paced share repurchases to FCF generation. While not anticipated, a material reduction in Coca-Cola's cash balance without a commensurate reduction in debt could result in a negative rating action.
At Dec. 31, 2012, Coca-Cola's leverage was 2.4x on a total debt to operating EBITDA basis, up from 2.2x a year ago. Fitch considers leverage above 2.0x as weak for the rating category but ratings incorporated the fact that Coca-Cola's net leverage at Dec. 31, 2012 was 1.2x. Fitch believes Coca-Cola should address its large CP balance in the near-to-intermediate term with any reduction in cash matching any corresponding reduction in CP levels.
Ratings also consider the potential of future acquisitions given the company's transaction history. Fitch recognizes Coca-Cola's acquisitions could be partially funded with debt, but believes the company would likely restore credit measures back in line within a reasonable timeframe given its excess cash generation and cash flow growth. For large transactions, Fitch would expect Coca-Cola to curtail share repurchases.
Coca-Cola has a manageable maturity schedule and robust access to the capital markets. Fitch expects Coca-Cola to opportunistically refinance the approximate $1.5 billion and $2.6 billion of long-term debt due in 2013 and 2014.
Positive: Future developments that may, individually or collectively, lead to positive rating include:
Coca-Cola's ratings could be positively affected by the company attaining total debt to operating EBITDA below 1.5x in combination with a stated commitment to maintain stronger credit protection measures.
Negative: Future developments that may, individually or collectively, lead to negative rating include:
Coca-Cola's ratings would be negatively affected by a large debt-financed acquisition or share repurchase program or a reduction in cash and cash equivalents without a commensurate reduction in CP balances. Fitch notes that while Coca-Cola has more CP outstanding than capacity under its various committed facilities, the company has consistently maintained a large cash balance, and the combination of cash and facility availability provide adequate backup for the CP. Coca-Cola had $16.3 billion of CP and other short-term borrowings at Dec. 31, 2012.
Fitch does not make a rating distinction between Coca-Cola Company and Coca-Cola Refreshments USA, Inc. (CCR) issued obligations, since default risk is very low at this level on the rating scale. CCR's notes are structurally superior to the notes issued by Coca-Cola.
Fitch currently rates Coca-Cola as follows:
The Coca-Cola Company
--Long-term Issuer Default Rating (IDR) 'A+';
--Bank credit facilities 'A+';
--Senior unsecured debt 'A+';
--Short-term IDR 'F1';
Coca-Cola Refreshments USA, Inc. and Coca-Cola Refreshments Canada, Ltd. (CCR)
--Long-term IDR 'A+';
--Senior unsecured debt 'A+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 9, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology