Fitch Ratings affirms Coca-Cola's long-term issuer default ratings at A+, bank credit facilities at A+

Nevin Barich

NEW YORK , February 24, 2012 (press release) – Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and the debt ratings of The Coca-Cola Company (Coca-Cola) and its subsidiaries as follows: The Coca-Cola Company --Long-term 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+'; --Senior shelf at 'A+'. The Rating Outlook is Stable. Fitch's actions affect approximately $28.6 billion of debt as of Dec. 31, 2011. 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 for a company like Coca-Cola. 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 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 would be credit negative. 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 $3.0 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 $3.0 billion to $4.0 billion. Ratings also consider the potential of future acquisitions given the company's transaction history. For large transactions, 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 1.5x 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 $2.0 billion and $1.5 billion of long-term debt due in 2012 and 2013. The Coca-Cola Company's (Coca-Cola) ratings are supported by its position as the largest global beverage company. Coca-Cola has fifteen $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 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.

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