CHICAGO--()--Fitch Ratings has assigned a 'BBB+' rating to International CCE, Inc.'s (New CCE) proposed $1 billion issuance of senior unsecured notes in tranches with maturities of five years and 10 years. The Rating Outlook is Stable.
The new notes will be issued by the parent company International CCE, Inc. and will rank pari passu with New CCE's senior unsecured indebtedness. The notes are being issued under the company's indenture dated Aug. 31, 2010. Significant covenants include, but are not limited to, limitations on liens and restrictions on sale-leaseback transactions. If New CCE does not consummate its transactions with The Coca-Cola Company (Coca-Cola) prior to May 25, 2011, New CCE must redeem all of the notes at a redemption price equal to 101% of the aggregate principal amount of the notes outstanding, plus accrued and unpaid interest from the date of initial issuance. New CCE expects to use the net proceeds of this offering to fund the acquisition of Norwegian and Swedish bottlers, to repay inter-company indebtedness between Coca-Cola Enterprises, Inc. (Old CCE) and its European subsidiaries which will become a part of New CCE, and for general corporate purposes, including share repurchases.
On Feb. 25, 2010, Coca-Cola and Old CCE reached an agreement for Coca-Cola to acquire Old CCE's North American bottling operations in exchange for Coca-Cola's 34% stake in Old CCE and Coca-Cola's assumption of the vast majority of Old CCE's debt. New CCE will be comprised of Old CCE's European territories - Great Britain, Belgium, Netherlands, Luxembourg, France and Monaco - and the cash of Old CCE as of transaction close. For any debt that Coca-Cola does not assume, of which there are two likely pieces - approximately $382 million of guaranteed unsecured Euro notes due Nov. 8, 2010 and roughly $188 million of Swiss Franc notes due March 13, 2013 - Coca-Cola will compensate New CCE with cash. Also, at close New CCE will acquire the Norwegian and Swedish bottlers owned by Coca-Cola for $822 million. In addition, New CCE gained the right to purchase at fair value the German bottler owned by Coca-Cola in 18 to 39 months. While a fair value has yet to be determined, it is expected to be significant. As a point of reference, the population of Germany is approximately 82 million, and New CCE's territory post-transaction will cover roughly 163 million consumers.
New CCE's ratings reflect the company's free cash flow generation enabled by sustainable operating margins, its commitment to an investment grade rating, its stated leverage target of net debt-to-EBITDA of 2.5 times (x) to 3.0x, and Fitch's expectation that New CCE will meet and maintain its target. However, the most important element underpinning the ratings is New CCE's exclusive right to manufacture, sell and distribute Coca-Cola brand beverages within its territories in Western Europe. The ratings also consider the limited geographic diversity of New CCE and the smaller size and relative importance within the Coca-Cola system, which is comprised of Coca-Cola and its anchor bottlers. The ratings further incorporate New CCE's relatively shareholder-friendly $1 billion share repurchase program to be executed over 18 months. Uncertainty surrounding the funding of the potential acquisition of the German bottler from Coca-Cola is also a factor in the ratings.
Attaining lower leverage than targeted in combination with a stated commitment to maintain lower leverage could result in a positive rating action. Coca-Cola acquiring a significant equity stake in new CCE and gaining board representation could also result in a positive rating action. Negative rating pressure could result from the following individually or in combination: carbonated soft drink volume declines without offsetting gains in growing beverage categories, margin declines due to competitive pressures, and more aggressive financial policies.
With its Western European operations, New CCE will retain the better performing portion of its bottling territory. In contrast to the U.S., soft drink volumes have been growing in Europe and higher operating margins have been sustainable. Year-to-date 2010 bottle and can volume in CCE's European territories grew 3% while volume declined 1% in North America. In 2009, European volume grew 5.5% while North American volume fell 5%. Year-to-date 2010 operating margins in North America improved to 8.9% but still markedly lag CCE's European operating margin of 16.3%. The less competitive soft drink market of Europe and lower capital intensity lead to the higher operating margins. Trademark Coca-Cola beverages have the majority of market share in New CCE's Western European territories. In contrast to the U.S. where the largest competitor to Coca-Cola beverages is PepsiCo, Inc., private-label competes with PepsiCo, Inc. for the next leading market share position in New CCE's territories.
Post transaction, New CCE is expected to have adequate liquidity. It recently closed a four-year $1 billion committed revolving credit facility and will maintain a meaningful cash balance. Old CCE's Europe operations generated over $430 million of average free cash flow (FCF) annually over the past three years which has grown each year. Annual FCF would have been higher with the addition of Norway and Sweden bottling profits. Shortly after expected transaction close, the 4.75% 300 million Euro guaranteed notes of New CCE mature on Nov. 8, 2010. The notes are likely to be refinanced. New CCE could either access the market at that time or possibly look to place more debt prior to the transaction close to refinance the debt.
As previously mentioned, New CCE is committed to maintaining an investment grade rating and has a stated target for net debt to EBITDA of 2.5x to 3.0x. Fitch projects New CCE will have total debt to operating EBITDA of 2.5x in 2011 and 2.4x in 2012. Assuming a weighted average interest cost of 5% for new debt issued, Fitch projects operating EBITDA to gross interest will be 5.8x in 2011 and 5.7x in 2012. Funds from operations (FFO) adjusted leverage is expected to be 3.4x and 3.3x in 2011 and 2012, respectively.
The guaranteed unsecured note ratings of New CCE's subsidiaries are based on The Coca-Cola Company's wholly-owned subsidiary Coca-Cola Refreshments USA, Inc.'s Issuer Default Rating (IDR) of 'A+'. Post-transaction, Coca-Cola Refreshments USA, Inc. will own Old CCE's U.S. bottling operations. The Coca-Cola subsidiary will inherit the guarantee of these notes since the transaction is structured as an acquisition and a spin-off with the Coca-Cola subsidiary acquiring the legal entity which guarantees the notes. In its agreement with Coca-Cola, New CCE must make a commercially reasonable effort to substitute New CCE or its subsidiaries as guarantor instead of the legal entity owned by the Coca-Cola subsidiary. Fitch assumes the noteholders will not release the Coca-Cola entity from its guarantee.
New CCE's current ratings are as follows:
International CCE Inc.
--Long-term IDR 'BBB+';
--Short-term
IDR 'F2';
--Bank credit facility 'BBB+';
--Senior unsecured
notes 'BBB+'.
Coca-Cola Enterprises Finance LT1 Commandite S.C.A.
--Long-term IDR
'BBB+';
--Guaranteed senior unsecured notes 'A+'.
Coca-Cola Enterprises (Canada) Bottling Finance Company
--Long-term
IDR 'BBB+';
--Guaranteed senior unsecured notes 'A+'.
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com.
Related Research:
--'Corporate Rating Methodology', dated Aug. 16,
2010;
--'Parent and Subsidiary Rating Linkage', dated July 14, 2010.
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.
Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Parent
and Subsidiary Rating Linkage Criteria Report
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826
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