CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to McDonald's (NYSE: MCD) EUR350 million (approximately $482 million) 2.875% senior unsecured notes due Dec. 17, 2025. At Sept. 30, 2013, McDonald's had $13.5 billion of total debt.
The notes were issued under McDonald's global medium term notes program dated Nov. 20, 2013, are not bound by financial covenants, and rank pari passu with existing debt. Proceeds will be used for general corporate purposes.
KEY RATING DRIVERS:
Substantial Cash Flow: McDonald's significant scale, well-established franchise network, and sound operating strategy support its substantial operating cash flow. For the latest 12 month period (LTM) ended Sept. 30, 2013, McDonald's generated approximately $7.1 billion of cash flow from operations (CFO) and $1.1 billion of free cash flow (FCF; defined as CFO less capital expenditures and dividends). Fitch believes CFO is sustainable at current levels or higher over the intermediate term due to low single-digit same-store sales (SSS), new unit development, and growth in franchise revenue.
Consistent Financial Strategy: McDonald's financial strategy is to reinvest in its business, return cash to shareholders, and maintain credit statistics appropriate for an 'A' credit rating. Capital expenditures are projected to approximate $3 billion in 2013 while dividends and share repurchases are expected to total a combined $4.5 billion to $5 billion.
McDonald's is targeting $2.9 billion to $3 billion of capital expenditures in 2014. Fitch views the firm's consistent high level of reinvestment as appropriate given the increasingly competitive nature of the global restaurant industry. Moreover, share repurchases are trending below recent levels at $1.3 billion through the nine-months ended Sept. 30, 2013, which Fitch believes is prudent.
Strong Global Market Position: McDonald's is the world's largest restaurant company and a widely recognized brand generating more than $88 billion of system sales, $27.6 billion of revenue, and $8.6 billion of operating income in 2012. Geographic segments and their percentage of 2012 revenue and operating income were: the U.S. (32% and 44%), Europe (39% and 37%), APMEA (23% and 18%), and other countries and corporate (6% and 1%). At Sept. 30, 2013, McDonald's had 34,923 worldwide units, up from 34,480 at Dec. 31, 2012.
Significant Franchise Revenue: Revenue from franchising, which includes sales-based royalties and contractual rent payments, was roughly $9 billion or 33% of McDonald's total revenue in 2012. Franchisees and affiliates operate 81% of the firm's system-wide units while the remaining 19% are company-operated. McDonald's owns about 45% of the land and 70% of the buildings for its system.
Fitch views franchising as a more stable source of cash flow because it is less susceptible to changes in restaurant-level expenses. Moreover, Fitch believes McDonald's franchise revenue is the highest quality in the industry due to the strength of its franchise network and the rent-based nature of its franchise business model.
Comprehensive Operating Strategy: McDonald's global priorities include optimizing its menu, modernizing the customer experience, and broadening accessibility to its brand. The firm's long-term average annual constant currency system-wide sales and operating income growth targets are 3%-5% and 6%-7%, respectively.
McDonald's has consistently met its system sales goals with annual global same-store sales (SSS) only declining twice since 1997. Although operating income growth has trended below the firm's long-term annual goal since 2012, McDonald's is balancing near-term business tactics with long-term strategic investments. With SSS expected to remain challenged in 2014, management is focused on offering affordable choices at every price tier across its menu. At the same time, the firm continues to invest in remodeling and digital-based platforms to engage customers and elevate the dining experience which Fitch believes will make it even more competitive.
For the nine-months ended Sept. 30, 2013, constant currency operating income grew 3% to $6.6 billion as higher franchise revenue and lower selling, general, and administrative expenses offset weak SSS and on-going cost inflation. For the year-to-date period through Nov. 30, 2013, global SSS increased 0.4% with the U.S. being up 0.1%, Europe flat, and Asia/Pacific, Middle East and Africa (APMEA) down 1.9%.
McDonald's credit statistics are in line with Fitch's expectations and are projected to remain mainly stable in 2014, even after the above mentioned debt issuance. For the LTM period ended Sept. 30, 2013, total debt-to-operating EBITDA was 1.3 times (x), operating EBITDA-to-gross interest expense was 19.0x, and funds from operations (FFO) fixed-charge coverage was 4.1x.
Rent-adjusted leverage, defined as total debt plus eight times gross rent expense divided by earnings before interest, taxes, depreciation, amortization and gross rent expense (EBITDAR), was 2.3x for LTM period. Rent adjusted interest coverage, defined as EBITDAR divided by gross interest expense plus gross rent expense, was 5.6x.
Liquidity and Maturities:
At Sept. 30, 2013, McDonald's had $4 billion of liquidity consisting of $2.5 billion of cash and an undrawn $1.5 billion committed revolving credit line expiring Nov. 8, 2016. Debt maturities as of Sept. 30, 2013, approximated $554 million in 2014, $1.1 billion in 2015, and $653 million in 2016.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Total debt-to-operating EBITDA and rent-adjusted leverage approximating 1.0x and 2.0x, respectively, margin stability, and high single-digit FCF margin to sales could result in a positive rating action.
--Sustainably strong SSS and operating income growth concurrent with a more conservative stance towards share repurchases and dividends would be a credit positive.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Total debt-to-operating EBITDA and rent-adjusted leverage over 1.5x and 2.5x, respectively, and materially lower FCF could lead to a negative rating action.
--A prolonged period of SSS declines and margin contraction without a corresponding pull back in share repurchases and dividend increases could result in a negative rating action.
Fitch currently rates McDonald's debt as follows:
--Long-term Issuer Default Rating (IDR) 'A';
--Bank credit facility 'A';
--Senior unsecured debt 'A';
--Short-term IDR 'F1';
--Commercial paper 'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5,2013);
--'McDonald's Corporation Update' (Sept. 13, 2013);
--'Fitch Affirms McDonald's IDRs at 'A1/F1'; Outlook Stable' (Sept. 6, 2013);
--'Fitch Rates McDonald's EUR350MM Notes Issuance 'A' (May 15, 2013);
--'Fitch Rates McDonald's Proposed $500MM Notes Issuance 'A'' (April 29, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage