NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to Mondelez International, Inc.'s (Mondelez) issuance of GBP400 million in senior unsecured 4.5% notes maturing on Dec. 3, 2035. Proceeds will be used for general corporate purposes, including refinancing an all cash tender offer for its outstanding GBP350 million 7.25% sterling notes due July 2018. The customary change of control provision at 101% of face value is in place.
KEY RATING DRIVERS
The Negative Outlook reflects Fitch's expectations for pressure on free cash flow in the near term from heavy restructuring related cash payments, particularly in 2016, and low core growth as reflected in negative volumes and lower-than-category growth rates in biscuits and chocolate year to date. Biscuits and chocolate represent approximately 70% of Mondelez's post-coffee profile. Fitch does note that the company reported that volume trends have recently begun to improve.
Near-Term Top-Line Weakness: Mondelez is experiencing a broad-based global macroeconomic slowdown in its categories exacerbated by the currency effects of a strong dollar. Organic revenue growth has been in the 2% - 4% range over the past three years. It has escalated to the top end this year as the company has taken higher levels of pricing than expected in the 6% - 7% range with negative volume in the 2% - 3% range as consumers react to sticker shock in weak emerging markets. FX, as with all multinational companies, has a large negative impact to the top line with -13% expected this year.
High Medium Term Leverage
Fitch expects that Mondelez is likely to operate at a gross leverage (total debt-to-EBITDA) range around 3.4x to 3.5x through 2016, executes share repurchases, and incurs peak cash restructuring charges. Total reported debt-to-EBITDA at the last 12 months was 3.0x at the end of 3Q2015 but that currently includes the operating income of the more profitable coffee operations over the past several quarters. The coffee operations were contributed to a new joint venture (Jacobs Douwe Egberts) on July 2, 2015.
High Cash Outlays/Negative FCF in 2016
In 2014 the company announced a $3.5 billion restructuring program to be executed from 2014 through 2018 with $2.5 billion in cash costs. The purpose is to reduce supply chain and overhead by $1.5 billion by the end of 2018. Fitch anticipates that Mondelez can achieve the bulk of its $1.5 billion annualized cost savings targeted by 2018, which should offset the loss of $600 million to $700 million in coffee EBITDA over time; however, savings are likely to be skewed to the outer years.
The majority of program charges were expected to occur in 2015 and 2016 with completion by year-end 2018. Additionally, as with most restructurings there are additional implementation costs which are directly attributable to those programs but do not qualify for special accounting treatment. Implementation costs can be meaningful. Notably, since inception the company has incurred $1 billion in charges including $710 million in restructuring charges and $290 million in implementation expenses.
Fitch had previously assumed around $1 billion in cash restructuring costs in 2015 and $800 million in 2016 which would result in modest negative free cash flow (FCF) in 2015 and modestly positive FCF in 2016. Year to date, cash paid towards the 2014 - 2018 program is $156 million. Given the current trajectory it appears that the bulk of cash outlays related to the 2014 - 2018 program will be in 2016. Mondelez generates a significant portion of FCF in the fourth quarter, and with muted spends thus far, FCF should positive this year but moderately negative in 2016.
Scale and Diverse Geographies: Mondelez's ratings incorporate its scale as 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 JDE. The company is well-balanced geographically with 39% of 2014 net revenue in higher-growth-potential emerging markets and 61% in mature developed markets. Mondelez has substantial scale with No. 1 global market share in biscuits, chocolate and candy as well as No. 2 global share in gum.
KEY ASSUMPTIONS
--2015 organic top line grows about 3% up from Fitch's expectations of 1.5% earlier in the year. Higher than expected pricing has boosted organic growth to the 3% range YTD. Growth rates of 2% to 3% are expected thereafter.
--Capex at $1.7 billion in 2015 and 5% of revenue in the medium term.
--FCF positive in 2015 and moderately negative in 2016 with higher cash restructuring next year than originally anticipated.
--Total debt-to-EBITDA in the 3.4x to 3.5x range in 2016.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
--EBITDA tracks below expectation due to a shortfall in expected operating margin improvement or further deceleration in organic top-line growth, aggressive financial policies or engaging in a large debt-financed acquisition, such that leverage is likely to be consistently above 3.5x.
Future developments that may, individually or collectively, lead to a positive rating action include:
--The Outlook is likely to be revised to Stable if Mondelez sustains organic growth, including flat to positive volumes in the low single-digit range; makes substantial progress toward its stated margin improvement which would take EBITDA to or above 2014 levels (with coffee) of $5.6 billion and EBITDA margin in the 19% to 20% range (relative to LTM EBITDA margin of 17.8%), with the company comfortably maintaining leverage in the 3.0x - 3.5x range by balancing shareholder and debtholder interests.
--Over the long term, leverage consistently in the mid- to high-2x range and FCF above $1 billion annually could support a positive rating action; however, this is not anticipated in the near to intermediate term.
LIQUIDITY
Mondelez's liquidity at Sept. 30, 2015, includes more than $2 billion in cash and equivalents and an undrawn $4.5 billion five-year senior unsecured revolving credit facility expiring in October 2018. Mondelez had $1.3 billion in commercial paper outstanding at quarter end. Upcoming long-term debt maturities are significant with $1.8 billion due in 2016 and $1.5 billion due in 2017. Fitch believes the company is likely to refinance 2016 and 2017 maturities and that today's actions at very low GBP rates are within expectations.
FULL LIST OF RATING ACTIONS
Fitch currently rates Mondelez as follows:
--Long-term Issuer Default Rating (IDR) 'BBB';
--Senior unsecured debt 'BBB';
--Credit facility 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook is Negative.
Date of Relevant Committee: May 8, 2015
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994325
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.