Fitch Ratings assigns A+ rating to Coca-Cola's proposed issuance of US$2.75B of notes with maturities of two, three and six years; outlook stable
March 11, 2012
Fitch Ratings has assigned an 'A+' rating to The Coca-Cola Company's (Coca-Cola) proposed issuance of $2.75 billion of notes with maturities of two -, three-, and six-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. The company plans to use the net proceeds to repay commercial paper. 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 exclude those covenants. Coca-Cola is not bound by any financial covenants. The three- and six-year notes are callable by Coca-Cola subject to a make-whole provision. Coca-Cola had $28.6 billion of debt as of Dec. 31, 2011.
Additionally, Fitch has withdrawn its rating of Coca-Cola Refreshments USA, Inc.'s (CCR) senior shelf. Coca-Cola has deregistered the shelf.
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 generated $9.5 billion and $2.3 billion of CFO and FCF, respectively, for the year ended Dec. 31, 2011, after generating over $9.5 billion and $3.2 billion for the year ended Dec. 31, 2010. The recent FCF was weighed down by a $769 million contribution to the company's pension plans in the first quarter of 2011 and cash outlays for restructuring. Fitch expects Coca-Cola's FCF to exceed $2 billion in 2012, due to its substantial CFFO, despite an additional $900 million contribution to its pension funds in the current year.
The ratings are further supported by Coca-Cola's unique and large cash position. Coca-Cola's leverage has increased to 2.2 times (x) on a total debt to operating EBITDA basis, which is outside of the 'A+' rating category. However, Coca-Cola's growing $14 billion balance of cash and short-term investments, primarily held outside the U.S., to some extent mitigates this. Fitch expects Coca-Cola to maintain this cash balance to provide backup to its commercial paper (CP) borrowings, which have increased because of its reluctance to repatriate cash and its desire to return cash to shareholders. Coca-Cola has a mismatch between its U.S. cash outflows and its significant international cash inflows. The late 2010 acquisition of CCR, its U.S. and Canadian bottling operations, will offset some of the cash flow mismatch, but it is expected to persist. A material reduction in Coca-Cola's cash balance without a commensurate reduction in debt may negatively impact its credit ratings.
Fitch expects Coca-Cola's operating income to grow in the low to mid-single digits in 2012, enabling stable credit metrics and growing cash flow generation. This forecast is based on the assumption that revenue grows in the low single digits range due to volume and price/mix increases partially offsetting adverse foreign currency effects. Operational efficiencies due to cost saving programs and ongoing restructuring activities related to the acquisition of CCR should also benefit operating income in 2012.
Coca-Cola has committed to another $2.5 billion to $3 billion of net share repurchases in 2012 after repurchasing $2.9 billion in 2011. While these commitments are large, they are below Fitch's estimate of normalized FCF of $3 billion to $4 billion. Ratings also consider the potential of future acquisitions given the company's transaction history. For a large debt financed transaction, Fitch expects the company to curtail share repurchases. Fitch recognizes Coca-Cola's acquisitions and share repurchases may be partially funded with debt, but expects the company to maintain credit statistics in line with current levels due to cash flow growth.
Coca-Cola's ratings could be positively affected by the company attaining total debt to operating EBITDA below 1.5 times (x) in combination with a stated commitment to maintain stronger credit protection measures. Conversely, 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 debt. 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 $12.9 billion of CP and other short-term borrowings at Dec. 31, 2011.
For the year ended Dec. 31, 2011, Coca-Cola's total debt to operating EBITDA was 2.2x, up from 2.1x a year earlier due higher debt balances. The company's gross interest to operating EBITDA was 30.5x at the most recent year end, increasing from 15.9x the previous year due to cycling of one time charges classified as interest in 2010. Coca-Cola's FFO interest coverage reflected a similar increase, rising to 25.6x from 13.8x over the same time period.
At Dec. 31, 2011, Coca-Cola's liquidity position of $18.6 billion consisted of $12.8 billion of cash, as mentioned previously, $1.2 billion of short-term investments, and $4.6 billion of availability under its committed credit lines and revolving credit facility. Coca-Cola has a manageable maturity schedule and robust access to the capital markets. Fitch expects the firm to refinance the approximate $2 billion and $1.5 billion of long-term debt due in 2012 and 2013.
Coca-Cola's ratings are supported by its position as the largest global beverage company. Coca-Cola has 15 $1 billion brands, including Coca-Cola, one of the world's most valuable. 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. This exposure is mitigated by Coca-Cola's market strength in developing, high-growth geographies.
Fitch does not make a rating distinction between Coca-Cola and 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) at 'A+';
--Bank credit facilities at 'A+';
--Senior unsecured debt at 'A+';
--Short-term IDR at 'F1';
--Commercial paper (CP) at 'F1'.
Coca-Cola Refreshments USA, Inc. and Coca-Cola Refreshments Canada, Ltd. (CCR)
--Long-term IDR at 'A+';
--Senior unsecured debt at '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. 12, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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