Fitch assigns BBB+ rating to Coca-Cola Enterprises' €350M 2.375% senior unsecured notes due May 7, 2025; outlook stable
April 29, 2013
– Fitch Ratings has assigned a 'BBB+' rating to Coca-Cola Enterprises, Inc.'s (CCE) newly issued 350 million Euro 2.375% senior unsecured notes due May 7, 2025. The Rating Outlook is Stable.
The notes are being issued under CCE's fiscal agency agreement effective May 2013 and rank pari passu with the firm's existing senior unsecured indebtedness. Terms do not include financial covenants but contain a restriction on liens. The notes are redeemable by CCE subject to a make-whole provision. CCE had approximately $3.3 billion of debt at March 29, 2013.
CCE plans to use the net proceeds of this offering for general corporate purposes, which may include refinancing of commercial paper, share repurchases, and the repayment of indebtedness. At March 29, 2013, CCE had $535 million of debt maturities over the next 12 months, including $123 million of commercial paper. The majority of CCE's debt obligations remain dollar-denominated. However, today's issuance helps narrow the currency mismatch between the firm's debt balances and its cash flow.
KEY RATING DRIVERS
CCE's ratings reflect its moderate leverage, good financial flexibility, and exclusive right to manufacture, sell and distribute Coca-Cola brand beverages in Western Europe. Coca-Cola products have leading market share in non-alcoholic ready-to-drink products in each of CCE's territories. During 2012, CCE generated $8.1 billion of net sales with 34% coming from Great Britain, 30% from France, 15% from Belgium, 8% from the Netherlands, 7% from Norway, and 6% from Sweden.
Ratings incorporate CCE's net debt-to-EBITDA target range of 2.5x to 3.0x and the firm's good free cash flow (FCF) generation. Fitch views the low end of CCE's leverage goal as appropriate for the 'BBB+' rating. FCF, which Fitch defines as cash flow from operations less capital expenditures and dividends, averaged $353 million for 2011 and 2012.
CCE is managing through the difficult economic environment in Western Europe. During the first quarter ended March 29, 2013, net sales declined 1% to $1.9 billion but reported operating income increased 2.5% to $111 million as the firm continues to focus on reducing cost via its Business Transformation Program.
Volumes, which decreased 1.5% during the quarter, showed sequential improvement from the mid-single digit declines experienced in the fourth quarter of 2012. Cost of sales per case increased 3% but net pricing per case only rose 2.5% as the firm is taking a more modest approach to pricing this year given marketplace conditions.
Fitch views CCE's 2013 guidance of low-to-mid single digit sales growth, mid-single digit operating income growth, and FCF prior to dividend payments of $450 - $500 million as achievable. However, CCE's FCF will be below historical levels in 2013 due to $125 million of one-time cash restructuring expense and higher dividend payments following a 25% increase in the firm's dividend earlier this year. Capital expenditures are expected to approximate $350 million during 2013, slightly below the $378 million spent in 2012.
CCE's credit metrics are in line with Fitch's expectations. At March 29, 2013, total debt-to-operating EBITDA was 2.7x, funds from operations (FFO) adjusted leverage was 3.4x, and operating EBITDA-to-gross interest expense was 12.9x. Total debt-to-operating EBITDA pro forma for the debt issuance is approximately 3.1x based on $1.3/EUR at April 26, 2013.
Fitch currently expects total debt-to-operating EBITDA to approximate 3.0x at Dec. 31, 2013. While slightly higher than Fitch had originally anticipated, leverage of 3.0x or less remains acceptable for current ratings.
FCF for the LTM period ended March 29, 2013 was $502 million. Given the firm's decision to allow the right to acquire The Coca-Cola Company's German operations to expire, CCE plans to utilize its FCF and incremental debt to repurchase $1 billion of shares during 2013. The firm expects to remain at the low end of its 2.5x - 3.0x net leverage target even with any additional debt. However, Fitch would expect CCE to become more conservative with buybacks if there is significant deterioration in operating performance.
Liquidity and Covenants
At March 29, 2013, CCE had $1.2 billion of liquidity inclusive of $221 million of cash and full availability under the firm's $1 billion multi-currency credit facility expiring in August 2014.
The credit facility requires that CCE's net debt-to-total capital ratio does not exceed 75%. Fitch estimates that this ratio was approximately 59% at March 29, 2013, providing CCE adequate cushion under this covenant.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Gross debt-to-operating EBITDA consistently below 2.3x or net leverage below management's targeted range of 2.5x to 3.0x due to operating income growth and continued strong FCF generation;
--Significant additional geographic diversification and/or an equity stake and board representation by Coca-Cola.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Gross debt-to-operating EBITDA sustained above 3.0x;
--Persistent declines in volumes concurrent with material margin compression and significantly lower FCF;
--Continued debt-financed share repurchases concurrent with materially weaker volumes and margin contraction;
--Material size debt-financed acquisitions, given declining room in current ratings.
Fitch currently rates CCE and its subsidiary as follows:
Coca-Cola Enterprises, Inc.
--Long-term IDR 'BBB+';
--Short-term IDR 'F2';
--Bank credit facility 'BBB+';
--Senior unsecured notes 'BBB+';
--Commercial paper 'F2'.
Coca-Cola Enterprises (Canada) Bottling Finance Company
--Long-term IDR 'BBB+';
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Disclosure: Veronique Morali, vice chairman of Fitch Group, Inc. and a member of its board, is also a member of the board of Coca-Cola Enterprises, Inc. Ms. Morali does not participate in any Fitch rating committees, including that of Coca-Cola Enterprises, Inc.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 11, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011);
--'Coca-Cola Enterprises, Inc.' (Aug. 21, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Coca-Cola Enterprises, Inc.
Carla Norfleet Taylor, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Wesley E. Moultrie, II
David E. Peterson
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