CHICAGO--(BUSINESS WIRE)--Fitch Ratings has placed Mondelez International, Inc.'s (Mondelez) ratings on Rating Watch Negative, as follows:
Mondelez International, Inc.
--Long-term Issuer Default Rating (IDR) 'BBB';
--Senior unsecured debt 'BBB';
--Credit facility 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
In addition, Fitch has withdrawn the 'BBB' long-term IDRs of Cadbury plc and Cadbury Schweppes U.S. Finance LLC. There is no outstanding debt at those entities and Mondelez does not expect to issue any new debt at these entities.
The Rating Watch follows Mondelez's recent announcement that the company and D.E Master Blenders 1753 B.V. (DEMB) intend to combine their respective coffee businesses, along with Mondelez's announcement of a new $3.5 billion restructuring program through 2018.
KEY RATING DRIVERS:
Rating Watch On Financial Strategy Uncertainty: Mondelez recently announced its intention to contribute its coffee business, which generated approximately $3.9 billion revenues in 2013, to the Jacobs Douwe Egberts (JDE) joint venture. Fitch estimates Mondelez's coffee business generated approximately $620 million to $740 million EBITDA based on EBITDA margins in the high teens. Mondelez expects to receive approximately $5 billion after tax cash during 2015, after the regulatory process is completed. The company will also hold a 49% equity interest in JDE, a pure-play coffee company with annual revenues exceeding $7 billion. Mondelez expects to use the majority of the proceeds for share repurchases, with the balance for debt reduction and general corporate purposes. The Rating Watch will be resolved when Fitch gains more clarity on management's financial strategy, particularly the timing and magnitude of cash usage for debt reduction and how restructuring cash outflows impact the company's credit protection measures.
Leverage Under Pressure: Fitch estimates that near term leverage could remain in the low 3x range, up from approximately 3.0x in 2013. Total debt is up $1.8 billion from year end 2013 to $18.9 billion due to share repurchases, increased working capital, and payment of taxes related to the Starbucks arbitration proceeds. Mondelez's $1 billion to $2 billion of share repurchases in 2014 could be partially debt financed, particularly at the higher level. In addition, the majority of $2.5 billion total cash costs for the company's $3.5 billion restructuring program through 2018 are expected to be incurred in 2015 and 2016. Capital expenditures are also elevated at approximately 5% of annual sales for the next few years. These combined factors lead Fitch to believe leverage could remain above Fitch's previous expectations in the high 2x range in 2014 and 2015, before the bulk of $1.5 billion annualized savings by 2018 are generated.
Restructuring Benefits Unlikely To Impact The Near Term: Mondelez expects to improve adjusted operating margins to 15% to 16% by 2016, up from approximately 12% in 2013, as zero based budgeting and the accelerated restructuring program outweigh modestly lower margins due to the exit of coffee. This should help replace the coffee EBITDA over time, but not enough to alleviate near term leverage pressure.
Scale And Diverse Geographies: Mondelez is still one of the largest global packaged food companies with approximately $31 billion in 2013 pro forma revenue (excluding the coffee business). Mondelez's revenues from snacking will increase to approximately 85% from 75% as it becomes more concentrated in biscuits, chocolate, gum and candy. The company retained substantial scale and No. 1 and No. 2 global market shares in key categories after the Oct. 1, 2012 spinoff of its former $19 billion North American grocery business. Mondelez is well balanced between emerging and developed markets.
Top-Line Pressure: Although Mondelez has approximately 40% of its revenue in faster growing emerging markets, the company is experiencing a broad-based global macroeconomic slowdown in key categories. As a result, Mondelez has steadily reduced its top line growth guidance, which is now approximately 3% for 2014. This is largely consistent with global category growth.
Ample Liquidity: Mondelez's liquidity at March 31, 2014, includes $2.4 billion cash and equivalents and an undrawn $4.5 billion five-year senior unsecured revolving credit facility expiring in October 2018. Mondelez had $2.2 billion CP at its most recent quarter end. Upcoming long-term debt maturities are significant and include $1.7 billion due in the next 12 months, as well as approximately $550 million due in June 2015 and $1.75 billion due in February 2016. These maturities could provide significant opportunity for debt reduction.
Future developments that may, individually or collectively, lead to a negative rating action include:
--If earnings or cash flow falter significantly or financial policies prove to be aggressive, such that leverage is consistently above the low 3.0x range.
Future developments that may, individually or collectively, lead to a positive rating action include:
--The Rating Watch could be resolved with an affirmation of the ratings if the company generates substantial and growing free cash flow (FCF), along with leverage consistently below approximately 3.0x.
--Maintenance of conservative financial policies, such as balancing share repurchases with a substantial amount of debt reduction, and progress toward achieving the company's stated margin improvement, would also support affirmation the current ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (August 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage