CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to The Coca-Cola Company's (Coca-Cola) proposed multi-tranche issuance of $5 billion of notes due in 2016, 2018, 2020 and 2023. 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. Coca-Cola will use the net proceeds from the offering to fund a redemption of the Company's $1.25 billion 0.75% Notes due November 2013, $1 billion Floating Rate Notes due March 2014 and $900 million 3.625% Notes due March 2014, to pay related fees and expenses including redemption premiums and for general corporate purposes. Coca-Cola has $36.2 billion of total debt as of the end of the third quarter 2013, of which $18.8 billion was 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 excludes those covenants. Coca-Cola is not bound by any financial covenants. The 2016 floating-rate notes may not be redeemed prior to maturity. The 2016, 2018, 2020 and 2023 notes are callable by Coca-Cola subject to a make-whole provision.
KEY RATING DRIVERS
Coca-Cola's ratings are supported by its position as the world's largest global beverage company and the value of the Coca-Cola brand. Coca-Cola has 16 $1 billion brands, including Coca-Cola, Diet Coke, Sprite, Powerade, Minute Maid, and Dasani. 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., growing scrutiny over artificial sweeteners and modest CSD growth in other developed countries. However, this risk is mitigated by Coca-Cola's market strength in developing, higher-growth geographies with low per capita consumption characteristics that provides an important offset.
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 has demonstrated good execution and resiliency with topline and cash flow growth driven by increasing volume, price/mix and improved operating expense leverage, despite persistent global macroeconomic pressure. Coca- Cola generated $7.7 billion and $2.3 billion (after adjusting for dividends) of CFFO and FCF respectively for the first three quarters of 2013, after generating $10.6 billion and $3.3 billion for the year ended Dec. 31, 2012.
Consequently, Fitch still expects Coca-Cola's FCF to exceed $3 billion in 2013.
Coca-Cola is tracking at the lower end of its long-term financial targets of 3%-4% worldwide volume and 6%-8% operating income growth. Despite the current macroeconomic headwinds, year-to-date volume growth was 2% and operating growth was 6% excluding the effects of structural considerations. The global economic recovery remains fragile, negatively affecting consumer spending, with pockets of volatility across emerging market regions.
Fitch is concerned about the significant growth in Coca-Cola's commercial paper (CP) balance over the past year. CP reached $18.8 billion at the end of the third quarter, an increase of $2.5 billion during 2013. This compares to $12.9 billion in 2011. The commercial paper mix now represents more than 50% of the firm's overall capital structure. Despite the company's strong liquidity and good market access, Fitch believes this level of CP could result in modestly higher financial risk over the longer term.
The growth in CP balances results from Coca-Cola's mismatch between its U.S. cash outflows and its significant international cash inflows which the company has been reluctant to repatriate. Coca Cola maintains a comparable cash balance along with its committed bank lines to provide backup to its CP borrowings. At Sept. 27, 2013, Coca-Cola's liquidity position of $26.9 billion consisted of $17.3 billion of cash, $3.2 billion of short-term investments, and $6.4 billion of availability under its committed credit lines and revolving credit facility.
Coca-Cola has committed to $3 billion to $3.5 billion of net share repurchases in 2013, after repurchasing a net $3.1 billion in 2012. Share repurchases are pacing close to FCF generation with $2.7 billion of common stock repurchased during 2013. While not anticipated, a material reduction in Coca-Cola's cash balance without a commensurate reduction in debt could result in a negative rating action.
Coca-Cola's leverage was 2.7x on a total debt to operating EBITDA basis as of Sept. 27, 2013, up from 2.2x a year ago. Fitch considers leverage above 2.0x as weak for the rating category but ratings incorporated the fact that Coca-Cola's net leverage at Sept. 27, 2013 was 1.2x. Fitch believes Coca-Cola should address its large CP balance in the near-to-intermediate term with any reduction in cash matching any corresponding reduction in CP levels. With the expected refinancing of debt maturing in 2013 and 2014, Coca-Cola nearest longer-term debt maturities are not until 2015 with $2.5 billion and 2016 with $1.7 billion coming due.
Ratings also consider the potential of future acquisitions given the company's transaction history. Fitch recognizes Coca-Cola's acquisitions could be partially funded with debt but believes the company would likely restore credit measures back in line within a reasonable timeframe given its excess cash generation and cash flow growth. For large transactions, Fitch would expect Coca-Cola to curtail share repurchases.
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.
Positive: Future developments that may, individually or collectively, lead to positive rating include:
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.
Negative: Future developments that may, individually or collectively, lead to negative rating include:
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 CP balances. 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 $18.8 billion of CP.
In addition, further negative pressure from increased declines with CSD volumes in the U.S., greater than expected volatility in emerging market regions, aggressive excise taxes increases in multiple regions, shift in focus from pricing to volume and margin erosion from channel mix shifts could also affect ratings.
Fitch currently rates Coca-Cola as follows:
The Coca-Cola Company
--Long-term Issuer Default Rating (IDR) 'A+';
--Bank credit facilities 'A+';
--Senior unsecured debt 'A+';
--Short-term IDR 'F1';
Coca-Cola Refreshments USA, Inc. and Coca-Cola Refreshments Canada, Ltd. (CCR)
--Long-term IDR 'A+';
--Senior unsecured debt 'A+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage