CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to Mondelez International, Inc.'s (Mondelez) planned issuance of CHF 675 million senior unsecured fixed-rate notes in the three tranches: A 2-year CHF 175 million note with a 0% coupon, a 6.75 year CFH 300 million note with a .625% coupon and a 10.75 year CFH 200 million note priced at 1.125%. Closing is expected at the end of March and proceeds will be used for general corporate purposes including refinancing upcoming maturities.
The notes will not be registered with the SEC; instead, they will be registered for sale only in Switzerland and may be redeemed early at par and in full if changes in tax laws or regulations result in Additional Payments such as withholdings, duties or assessments. The customary change of control provision at 101 is in place.
Mondelez's ratings remain on Rating Watch Negative. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
Scale And Diverse Geographies Support Ratings: Mondelez remains one of the largest global packaged food companies with approximately $30 billion pro forma 2014 net revenue after $3.8 billion estimated revenue contribution to the coffee joint venture (JV) [details below]. Mondelez's revenues from snacking will increase to approximately 84% from 75% as it becomes more concentrated. The company will continue to have substantial scale with No. 1 global market share in biscuits, chocolate and candy as well as No. 2 share in gum. Mondelez is well balanced geographically with 38% of 2014 net revenue in higher growth potential emerging markets and 62% in slower growth developed markets.
Restructuring Supports Margin Improvement, but Top Line Slows: Fitch believes Mondelez's plans to improve adjusted operating margins to at least 15% by 2016, up from approximately 12% in 2013, should be achievable as the company's aggressive zero based budgeting and restructuring program can outweigh modestly lower margins due to exiting the coffee business.
Benefits from restructuring should help replace the coffee EBITDA over time, but may not be sufficient to alleviate potentially higher leverage in the mid-3x range pro forma for the coffee JV in the short-term. The company is experiencing a broad-based global macroeconomic slowdown in its categories, with global growth per Nielsen Global Data falling below 4% in 2014 from the 6% range in 2011 and 2012. In 2014 the company's organic top line in core snacks was only 1.6%. Fitch believes near term top line growth will be difficult, and reported top line currently has a significant currency headwind in 2015 of roughly 11%.
Over the long term, Mondelez targets organic net revenue growth at or above category growth and adjusted operating income growth in the high single digits. Mondelez has recently made progress improving adjusted operating margins by 80 bps in 2014 to 12.9%, largely through reduced supply chain and overhead costs. However, the company still has a significant gap to reach the sector peer margin average, and activist investor Nelson Peltz on the Board could agitate for faster changes.
Ample Liquidity: Mondelez's liquidity at Dec. 31, 2014, includes $1.6 billion cash and equivalents and an undrawn $4.5 billion five-year senior unsecured revolving credit facility expiring in October 2018. Mondelez had $1.1 billion CP at year end. Upcoming long-term debt maturities are significant and include $1.5 billion due in 2015, as well as $1.8 billion due in 2016. The company expects to fund 2015 maturities with cash from operations and CP or additional debt.
Watch Negative Reflects Financial Strategy Uncertainty: The Rating Watch followed Mondelez's May 2014 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 including $2.5 billion cash charges through 2018.
Mondelez intends to contribute its coffee business to the Jacobs Douwe Egberts (JDE) joint venture. Fitch estimates Mondelez's coffee business EBITDA at approximately $625 million to $725 million with margins in the high teens. The company expects to receive approximately $5 billion after tax cash during 2015, after the regulatory process is completed. Mondelez 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. Fitch expects to resolve the Rating Watch in the near term upon gaining more clarity on management's financial strategy, particularly the balance between debt reduction and share repurchases. Fitch expects the ratings to remain investment grade.
Leverage Potentially Up with JV: Total debt to EBITDA was 3.1x, EBITDA to interest expense was 7.0x and FFO adjusted leverage was 4.6x for the latest 12 months ended Dec. 31, 2014. Annual share repurchases of $1 billion to $2 billion are likely to be debt financed, due to lack of cash flow for buybacks after a peak level of about $1 billion of cash restructuring charges in 2015. The majority of cash costs for the company's restructuring program are expected to be incurred in 2015 and 2016. Capital expenditures are also elevated at approximately 5% of annual sales. These combined factors lead Fitch to believe leverage could rise above the low 3x range before the bulk of $1.5 billion annualized cost savings by 2018 are generated.
--2015 organic top line about [guidance is 'at least'] 2% growth including about 1% reduction due to strategic decisions to improve revenue mix and exit low margin business. Reported top line heavily impacted by negative currency impact currently estimated at about 11%.
--Continued improvement in adjusted operating income margins, up near 15% in 2016. About $500 million /year net productivity cost savings or about 2-3% of cogs is factored into this margin improvement.
--FCF (cash flow from operations less capex and dividends) estimated at approximately $1.1 billion in 2015 [guidance is $1.2 billion], or only about $100 million after $1 billion cash restructuring cost in this peak year.
--Likely debt increase to fund share repurchase plans in 2015 of $1-2 billion (excluding share repurchases with JV proceeds).
--Coffee JV currently expected to close in the third quarter of 2015. Uncertain level of share repurchases with the proceeds, but anticipated to be the majority of proceeds.
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 likely to be 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 in the low 3.0x range or better.
--Maintenance of conservative financial policies, such as balancing share repurchases with debt reduction, and continued progress toward achieving the company's stated margin improvement, would also support affirmation the current ratings.
The following ratings remain on Rating Watch Negative. The ratings where placed on Negative Watch on May 6, 2014.
Mondelez International, Inc.
--Long-term Issuer Default Rating (IDR) 'BBB';
--Senior unsecured debt 'BBB';
--Credit facility 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014).