CHICAGO--()--Fitch Ratings has assigned an 'A' rating to PepsiCo, Inc.'s (PepsiCo) newly issued $625 million floating rate notes due Feb. 26,2016, $625 million 0.7% notes due Feb. 26, 2016, and $1.25 billion 2.75% notes due March 1, 2023. PepsiCo plans to use the net proceeds for general corporate purposes, including the repayment of commercial paper which totaled $1.1 billion at the end of 2012.
The notes will be issued by PepsiCo, Inc. and will rank equally with PepsiCo's senior unsecured obligations. The notes are being issued under the company's existing indenture dated May 21, 2007. Significant covenants include limitations on secured debt. PepsiCo is not bound by any financial covenants. The notes are callable by PepsiCo subject to a make-whole provision. PepsiCo had approximately $28.4 billion of debt at Dec. 29, 2012.
KEY RATING DRIVERS:
PepsiCo's ratings reflect its substantial cash flow generation, significant scale, product diversification, increasing exposure to faster growing emerging markets, and position as the world's second-largest food and beverage company. Annual cash flow from operations and free cash flow (FCF) have averaged $8.6 billion and $2.4 billion, respectively, since 2010.
PepsiCo's $65.5 billion of net revenue in 2012 was split 51% beverages/49% food; 49% was generated outside of the United States with emerging or developing markets representing slightly more than one-third of the total. Russia and Mexico are PepsiCo's largest markets outside of North America, representing 7% and 6%, respectively, of net sales in 2012. PepsiCo's portfolio consists of 22 brands, including Pepsi, Gatorade, Lay's, Doritos, Quaker, and Tropicana, with more than $1 billion in annual retail sales that are typically No. 1 or No. 2 in their respective categories.
PepsiCo's financial strategy, which Fitch has viewed as aggressive given share repurchase activity concurrent with acquisitions resulting in periodic increases in leverage, is also factored into ratings. Investing in its business, returning cash to shareholders, and maintaining credit ratings that provide ready access to capital are key elements of PepsiCo's financial strategy. Share buybacks have averaged a net $2.5 billion per year since 2010. In the first quarter of 2013, PepsiCo approved a new share repurchase program, which will succeed the current repurchase program that expires on June 30, 2013, for up to $10 billion of PepsiCo common stock from July 2013 through June 2016. Dividends have grown annually by 6% or more over the past several years to more than $3.3 billion in 2012. PepsiCo anticipates dividends and share repurchases will total approximately $6.4 billion in 2013.
Operationally PepsiCo is focused on increasing brand support to grow market share, expanding its emerging market presence, growing its nutrition business, reducing overhead, and leveraging technology and processes across its organization. PepsiCo has made noticeable progress on this strategy. Fitch believes PepsiCo's strategic initiatives will help the company to meet its long-term financial targets of mid-single-digit and 6%-7% constant currency net revenue and operating income growth, respectively. Current year operating income was affected by an uptick in brand investments and spending to support productivity efforts.
Acquisitions and strategic alliances are expanding PepsiCo's emerging markets presence while supporting its product goals in nutrition and beverages. Brand building efforts appear to be paying off as consolidated volumes were up 1% while pricing increased 4% for 2012. Finally, the firm's multi-year productivity initiatives are on track to deliver $3 billion of savings by 2015.
For the latest 12-month (LTM) period ended Dec. 29, 2012, total debt-to-operating EBITDA was 2.3x, operating EBITDA-to-gross interest expense was 13.7x, and funds from operations (FFO) adjusted leverage was 3.5x. PepsiCo's leverage is modestly higher than similarly rated food and beverage companies but ratings are supported by, as mentioned previously, the company's substantial and stable FCF, significant scale, diversification, and brand leadership.
Fitch expects total debt-to-operating EBITDA leverage to remain in the low 2.0x range during 2013. PepsiCo's expected operating cash flow will be much less affected by pension and retirement medical plan contributions than 2012. PepsiCo expects to make contributions of approximately $240 million in 2013 compared with payments of almost $1.9 billion in 2012. Consequently, PepsiCo's cash flow growth should improve as added benefits from its strategic initiatives around brand support and productivity savings are realized.
Liquidity, Covenants, and Maturities:
PepsiCo maintains good liquidity. As of the end of 2012, the firm had $6.6 billion of cash and short-term investments, with $5.3 billion of the cash offshore, and combined capacity of $5.85 billion under its 364-day and four-year revolving credit facilities. PepsiCo's revolvers expire in June 2013 and June 2016, respectively, and are not bound by financial covenants. Fitch recognizes that repatriation of cash could result in incremental taxes but given PepsiCo's financial flexibility believes PepsiCo would more likely use the cash to grow in overseas markets.
Maturities of long-term debt at Dec. 29, 2012 included $2,891 million in 2013, $3,237 million in 2014, and $3,300 million in 2015. At the end of 2012, $4,815 million of PepsiCo's debt was classified as current.
PepsiCo guarantees all of the senior notes of its bottling subsidiaries - Pepsi-Cola Metropolitan Bottling Company (wholly owned by PepsiCo; Metropolitan Bottling) and Bottling Group, LLC (wholly owned by PMBC). While the notes of Metropolitan Bottling and Bottling Group, LLC are structurally superior to the notes issued by PepsiCo, Inc., Fitch has chosen not to make a distinction in the ratings at the single-A level, as default risk is very low.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Total debt-to-operating EBITDA below 2.0x and Fitch's belief that PepsiCo would manage its balance sheet to sustain an 'A+' rating.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Significant debt-financed acquisitions or share repurchases and/or deteriorating operating performance that causes total debt-to-operating EBITDA to be sustained above the mid 2.0x level;
--Substantial and sustained declines in cash flow would also likely prompt negative rating actions.
Fitch currently rates PepsiCo as follows:
--Long-term Issuer Default Rating (IDR) 'A';
--Senior unsecured debt 'A';
--Bank credit facilities 'A';
--Short-term IDR 'F1';
--CP program 'F1'.
Pepsi-Cola Metropolitan Bottling Company, Inc. Operating Company/Intermediate Holding Company)
--Long-term IDR 'A';
--Guaranteed senior notes 'A'.
Bottling Group, LLC (Operating Company)
--Long-term IDR 'A';
--Guaranteed senior notes 'A'.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Assigning Corporate Ratings to Issuers in Restructuring
Corporate Rating Methodology