Fitch Rates McDonald's EUR2.5B Debt Issuance 'BBB+'

CHICAGO--()--Fitch Ratings has assigned a 'BBB+' rating to McDonald's Corporation (NYSE:MCD) multi-tranche debt issuance. The Rating Outlook is Negative. The EUR2.5 billion issuance includes four-year, seven-year, and twelve-year fixed-rate senior unsecured notes. At Dec. 31, 2015, McDonald's had $24 billion of total debt. A full list of ratings follows at the end of this release.

The notes, which rank pari passu with existing debt, are being issued under McDonald's U.S. global medium-term notes program dated Nov. 13, 2014. Terms do not include financial covenants. Proceeds will be used for general corporate purposes, inclusive of share repurchases.

McDonald's ratings balance the company's aggressive financial strategy with its substantial cash flow, significant scale, and the strength of its brand. Key rating drivers include on-going comp trends, the company's financial strategy, and continued progress with refranchising and cost reduction efforts. Fitch projects total debt/EBITDA and total adjusted debt/EBITDAR will be sustained in the high-2.0x and mid-3.0x range, respectively, over the intermediate term.

KEY RATING DRIVERS

Sustainability of Recent Positive Comparable Sales Trend

McDonald's global comparable sales (comps) have increased at a mid-single-digit rate for three consecutive quarters, rising 6% in the quarter ended Mar. 31, 2016, after being negative for two consecutive years. All segments are contributing to the recent improvement. Comps increased 5.4% in the U.S., 5.2% across International Lead markets, 3.6% in High Growth markets, and 11% in Foundational markets in the latest quarter. Consolidated guest counts rose 1.8%.

Fitch believes McDonald's is making meaningful progress with its turnaround plan and that recent comp strength can be attributed in part to the launch of All-Day Breakfast in the U.S., a renewed focus on restaurant operations, and a continued focus on value around the world. Fitch expects at least 3% growth in 2016 due to continued consumer excitement around All-Day Breakfast, the company's current Monopoly promotion in the U.S., and the pending launch of a national value platform. Whether at least 2% comp growth can be sustained over time will become more evident as the company laps easy prior year comparisons.

Aggressive Financial Strategy, Increased Leverage

In November 2015, McDonald's announced plans to increase cash returned to shareholders via dividends and share repurchases to about $30 billion during the three-year period ending 2016, up from $20 billion previously. The company has issued approximately $12.6 of incremental debt over the past year to help fund the cash-return goal. Fitch assumes debt will be sustained at around the current level over the near term and projects total debt/EBITDA and total adjusted debt/EBITDAR will be approximately 2.8x and 3.6x, respectively, for 2016.

Shift Toward a Higher Mix of Franchised Units

McDonald's intends to increase the percentage of its global system that is franchised to 93% by the end of 2018 from 81% currently by selling 4,000 units to operators. Longer term McDonald's strives to become 95% franchised. Refranchising will mainly occur in McDonald's High Growth and Foundational market segments which are currently 46% and 91% franchised, respectively. High Growth markets include China, Italy, Poland, Russia, South Korea, Spain, Switzerland, and the Netherlands. Foundational markets include various countries outside of the U.S. and International Lead markets (Australia, Canada, France, Germany, and the U.K.). McDonald's has refranchised about 700 units over the past five quarters.

Fitch views McDonald's shift towards a higher mix of franchised units as consistent with industry trends. Franchising increases the stability and quality of cash flows, given that it produces a steady stream of royalty and rental income and has low capital requirements. This assumes franchisees remain financially healthy, continue to invest in their operations, and drive positive growth. Fitch anticipates that capital expenditures will decline meaningfully from approximately $2 billion expected for 2016, if the company successfully meets its goal.

Significant Cost Reductions

McDonald's is targeting $500 million of annualized G&A cost reductions with the vast majority being realized by the end of 2017. The goal represents nearly 20% of McDonald's $2.6 billion expense base at the beginning of 2015. Savings will be realized through refranchising, lower corporate overhead, and greater efficiencies across global business services. The company expects to realize $150 million of savings by the end of 2016. Fitch anticipates savings to accelerate with the pace of refranchising and, along with incremental royalty and rental-based income, to help offset operating income declines associated with the sale of company-operated restaurants.

KEY ASSUMPTIONS

--Positive low-single-digit SSS growth of about 3% in 2016 and 2% beyond;

--Operating income grows at a high-single-digit rate in 2016 but increases at a slower rate thereafter due to refranchising;

--Total debt is sustained in the $26 billion range in 2016;

--Free cash flow (FCF) is approximately $1 billion - $1.5 billion annually;

--Total debt/EBITDA and total adjusted debt-to-operating EBITDAR (defined as total debt plus 8x gross rents-to-operating EBITDA plus gross rents) are sustained in the high 2.0x and mid-3.0x range, respectively, over the intermediate term.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--Fitch's view that McDonald's can sustain positive low-single-digit SSS and that market share has stabilized;

--Continued meaningful progress with refranchising and realization of cost savings;

--Total adjusted debt-to-operating EBITDAR sustained in the low-3.0x range.

Future developments that may, individually or collectively, lead to a negative rating action include:

--The inability to sustain positive comps which would indicate market share losses;

--The lack of meaningful progress with refranchising and realization of cost savings due to higher than expected investments in the business being an offset;

--Total adjusted debt-to-operating EBITDAR sustained in the mid-3.0x range due to weaker than expected operating results and share buybacks.

LIQUIDITY AND MATURITIES

McDonald's liquidity is supported by its large cash balance, free cash flow (FCF; cash from operations less capex and dividends), and an undrawn revolving credit facility that expires December 2019. At Dec. 31, 2015, McDonald's had $10.2 billion of liquidity consisting of $7.7 billion of cash, the majority of which is expected to be deployed to share buybacks, and $2.5 billion revolver availability. FCF typically exceeds $1 billion annually and was $1.5 billion for 2015. Aggregate maturities of long-term debt over the next three years at Dec. 31, 2015 are approximately $1.1 billion in 2017 and $1.8 billion in 2018. No maturities exist for 2016. Fitch anticipates debt will be refinanced given McDonald's shareholder-friendly financial strategy.

McDonald's current ratings are as follows:

--Long-term IDR 'BBB+';

--Bank credit facilities 'BBB+';

--Senior unsecured debt 'BBB+';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

The Rating Outlook is Negative.

Date of Relevant Rating Committee: Nov. 11, 2015

Additional information is available on 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

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Contacts

Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W Madison St
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W Madison St
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com