NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A' rating to Kimberly-Clark Corporation's (KMB) new senior unsecured notes totalling $550 million. The notes will be in five year and 10 year tranches with amounts to be determined later today. The Rating Outlook is Stable. Proceeds will be used to repay the $300 million 4.875% notes due Aug. 15 2015 and reduce the $892 million balance of commercial paper outstanding at June 30, 2015. Leverage at the latest 12 months (LTM) was 1.9x, and will remain within Fitch's expectations as this transaction should be relatively debt neutral.
The notes will be issued under a global indenture dated March 1, 1988 as further supplemented. The indenture contains limitations on liens and sale/leaseback transactions; however, there are no financial covenants in the indenture. Similar to notes issued after 2006 there is a Change of Control Triggering Event. The trigger is upon the occurrence of both a Change of Control (any person becomes the beneficial owner of 50% or more of shares or a substantial disposition of property, for example) and a rating downgrade to below investment grade from each of the three rating agencies. In this event, unless the company has exercised its right to redeem the notes, Kimberly-Clark will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount plus accrued and unpaid interest to the date of repurchase.
KEY RATING DRIVERS
Scale, Leadership in Stable Sector:
KMB's scale, with approximately $19 billion in revenues, leading market shares in tissue-based personal care products, as well as strong liquidity, are key underpinnings to the rating. The firm is a global hygiene company with approximately 50% of net sales and 65% of operating profit (before Corporate & Other expenses) generated in North America. Its principal products such as Huggies diapers, Depends for adult incontinence and Andrex toilet paper occupy leading positions in most markets. Euromonitor International cited that the company's diaper/pant was the second leading brand in the U.S. with a 39% share in 2013.
Commitment to Rating Profile:
KMB's management is mindful of the company's corporate ratings and publicly states its commitment to operating within the 'A' category. Historically, discretionary activities such as share repurchases have been scaled back when cash flows experience pressure or if fill-in acquisitions are required. The last instance was in 2009 when the company suspended share repurchases and increased the contribution to its pension plan by $716 million partially close the large funding gap that developed after the financial crisis of 2008.
Modest Leverage Cushion:
Fitch expects the company to scale back some of its discretionary activities or reduce debt to maintain leverage at or below 2x. KMB operates with leverage below 2x and should continue in this fashion. As long as the company maintains its current business momentum, which includes solid levels of brand support and innovation, the company could add nearly $400 million in debt at this juncture with minimal rating implications.
Intermittent Input Cost Pressures:
Commodities used in the manufacturing process, such as resin, pulp, and energy, experience periods of price volatility that can pressure margins. The near term commodity outlook is benign and likely to be modestly deflationary given the rapid decline in oil prices. However, longer term, oil and other input costs will generally remain volatile and may resume their general upward momentum.
KMB has addressed increased costs through ongoing and intermittent restructuring programs, pricing in some markets, and exiting low margin regions and product lines. The company has a long and successful track record of containing costs and has had solid organic growth rates in the 3% to 5% range. As a result, EBITDA margins have sequentially improved to 21.9% for the LTM as of June 30, 2015 from 18.9% in 2011. A focus on costs and organic growth should moderate or limit the negative impact of future input cost spikes.
KEY ASSUMPTIONS
Leverage remains below 2x.
Fitch's previous assumption was that net revenue (excluding the Halyard Health, Inc. spin-off) declines at the upper end of the company's public guidance of 3% to 6% reflecting a currency drag of 8% to 9%. The currency drag has shifted to 9% to 10% for the first half supporting Fitch's view. Of comfort however, is the fact that volumes for the six months have held up in the 3% range (and on the higher end of guidance) given modest pricing actions and is better than Fitch's expectations. Cost savings and an improving commodity environment have also helped margins more than expected.
EBITDA margins were expected to tick modestly below last year's 20.8% with less sales than expected over fixed costs. Based on Fitch's expectations for crude at $50/bbl in 2015 and $60/bbl in 2016, if currencies stabilize around current levels there is likely to be larger deflation that could further improve margins. This was not factored in previously to be conservative. However based on the current trajectory with commodity deflation and volume growth, margins in 2015 are likely to be better than Fitch had anticipated.
KMB has very strong financial flexibility and will continue to manage to have strong credit protection measures within the current rating category.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to an upgrade include:
The company has the flexibility to manage its credit metrics at stronger levels given stable cash flows. Committing to operating with leverage below 1.5x would support upward migration. However, the company appears comfortable with its current ratings and thus an upgrade does not appear likely.
Future developments that may potentially lead to a negative rating action include:
A change in financial strategy to operate with leverage above 2x, most likely through a large debt financed share repurchase program or a transformative acquisition, would be a negative driver. Such an event would be assessed upon its occurrence. Further, any impairment in the company's ability to consistently generate operating cash flow in the $2.5 billion to $3 billion range would be of concern. These situations could arise due to meaningful market share losses or prolonged and significant increases in major commodities concurrent with an inability to fully pass on price increases.
LIQUIDITY AND DEBT STRUCTURE
At June 30, Kimberly-Clark had very comfortable liquidity of $2.6 billion with approximately $600 million in cash on hand and a $2 billion unutilized revolver maturing in June 2019. The company normally holds most of its cash in international markets and as such it may not all be available to reduce debt balances. Long-term debt maturities in the next two years are moderate at less than $600 million. The current action is within Fitch's expectations that assumed the company would refinance near term maturities in order to maintain the current capital structure and leverage in the 1.5x to 2x range.
The company's strong financial flexibility stems from its ability to consistently generate approximately $3 billion in operating cash flow annually. Operating cash flow is likely to fall below the three year average of $3 billion to $2.5 billion to $3 billion in 2015 with pressure on margins and profits from a strong U.S. dollar but should revert to historical levels in 2016 and thereafter. Dividends and capex have a $2.3 billion run-rate and are the basics needed to re-invest in the company and meet shareholder expectations. Fitch notes that KMB has generated at least $2.3 billion in operating cash flow since 2002. Funds from operations (FFO) interest coverage has likewise been healthy in the 10x range.
FULL LIST OF RATING ACTIONS
Fitch currently rates KMB as follows:
--Long-term Issuer Default Rating (IDR) 'A';
--Short-term IDR'F1';
--$2 billion commercial paper (CP) program 'F1';
--$200 million dealer remarketable securities 'A'/'F1';
--$2 billion revolving credit facility 'A';
--Senior unsecured notes and debentures 'A'.
The Rating Outlook is Stable.
Date of Relevant Committee: Feb. 10, 2015.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988960
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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