Fitch Affirms Coca-Cola Enterprises at 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Coca-Cola Enterprises, Inc.'s (CCE's) ratings including the Issuer Default Rating (IDR) at 'BBB+'. The affirmation follows approval by CCE shareholders and regulatory approval by the UK Listing authority of Coca-Cola European Partners' plc (CCEP) prospectus. Fitch has affirmed and withdrawn CCE's bank credit facility, Short-Term IDR and Commercial Paper (CP) ratings since CCEP will establish a CP program and EUR1.5 billion RCF.

CCEP will be the new UK domiciled Western European bottler, combining the bottling operations of CCE, Coca-Cola Iberian Partners (CCIP) and Coca-Cola Erfrischungsgetranke AG. The transaction closed on May 28. A full list of rating actions follows at the end of this release. The Rating Outlook is Stable.

KEY RATING DRIVERS

Combination Improves Sustainability of Underlying Operations

CCEP had pro forma 2015 revenue and EBITDA in excess of $12 billion and $2 billion, respectively. Fitch views the new bottling combination as a positive long-term step toward improving the sustainability of cash generation for the Coca-Cola System's underlying business operations in Western Europe. The merger increases operational scale, creates synergy opportunities, better leverages best practices and improves operational strategy across 13 contiguous countries. This should improve efficiencies, thus increasing CCEP's ability to invest behind the brands.

Annual run rate transaction synergies and cost improvement initiatives unrelated to the transaction that are in process at each entity are estimated in the range of $350 to $375 million in aggregate during the next three years. Fitch believes these cost reduction opportunities are mostly achievable but timing could be delayed due to the complex execution risks around the time-consuming integration process of merging three companies that will require significant management attention and challenges with the labor environment in Europe. The German operations have much weaker profitability due in part to its cost structure. Accordingly in March 2016, a restructuring was announced to close two production sites, six distribution sites, a phase out of a refillable PET production line and employee lay-offs that resulted in a restructuring charge of approximately EUR137 million.

Strategic Importance to Coca-Cola

CCEP will be the largest independent Coca-Cola bottler based on net sales serving over 300 million consumers across 13 countries. The Coca-Cola Company's 18% ownership position, which includes two board seats, should also enhance the strategic alignment within the Coca-Cola system between the two companies. Consequently, Fitch believes CCEP's ratings derive benefit given its strategic importance within the Coca-Cola system.

Operating Performance Challenged

CCEP is facing persistent headwinds with the macro environment in various parts of Western Europe characterized by reduced consumer spending, higher unemployment and the negative effects of austerity programs. Fitch's Global Economic Outlook for GDP in 2016 is more favorable in Spain (2.8%) than in United Kingdom (1.9%), Germany (1.8%), and France (1.4%).

Structural challenges due to health and wellness trends have affected demand for carbonated soft drinks in developed markets which constitute in excess of 80% of CCEP's total volume. Volume trends are slightly more positive within the CCIP and German regions with low single digits increases for CSDs compared with declines in the low single-digit for CCE territories where declines increased in the first quarter 2016 to 4% due to supply chain disruptions in Great Britain that have since been resolved. Additionally, several European countries are considering the implementation of excise tax increases including the U.K., which proposed a material excise tax for drinks with a high sugar content that would take effect in 2018.

Consumer behavior and purchasing decisions continue to be shaped by post-recession after effects with more consumers embracing smaller and more frequent shopping trips. Many consumers remain cash conscious, seeking good value for their spending patterns although brands remain important to consumers as non-alcoholic beverages do benefit from the growing premium trend. The challenging environment thus places more importance on the need for Western European consolidation to improve efficiencies, operational scale and focus on synergy opportunities to improve their ability to invest behind the brand. Given the expected environment, Fitch believes CCEP's long-term core target of growing net sales in the low single-digit range and operating income in a mid-single-digit range is relatively reasonable.

Transaction Financing and Capital Structure

The cash consideration portion of the transaction, estimated at EUR3.2 billion, will be financed using a combination of net proceeds from a euro bond offering, an amortizing EUR1 billion term facility and cash on hand. CCEP had also closed on a EUR2.3 billion bridge term loan facility maturing in May 2017 that will not be used. The new transaction senior notes and revolving credit facility will reside at the new parent company, CCEP. The EUR1 billion term loan will be at UK Holdco Limited, resulting in approximately 17% of the debt at the subsidiary level. The term loan provides CCEP with flexibility to repay debt through FCF generation. After the transaction closes, a new two-way guarantee will exist between CCEP and CCE. CCIP and the Germany subsidiaries will not provide an upstream guarantee as part of the new capital structure.

Pro forma Leverage High, Deleveraging Expected by 2017

Pro forma consolidated gross leverage for CCEP at transaction close is estimated in the upper 3x, which is high for the ratings. However, Fitch anticipates CCEP will generate material levels of FCF with CCEP reducing debt to lower gross leverage back under 3x by the end of 2017, which is within Fitch's rating sensitivities.

Strong Market Position

CCE's ratings reflect its stable cash flows, strong market position, and exclusive right to manufacture, sell and distribute Coca-Cola brand beverages in Western Europe. Coca-Cola products have leading market share that allows for premium pricing of the Coca-Cola brands within CCE's non-alcoholic ready-to-drink portfolio for each of its territories. For 2015, CCE generated approximately $7 billion of net sales with almost two thirds of revenue coming from its largest two markets, Great Britain and France.

KEY ASSUMPTIONS

Key assumptions within Fitch's rating case in 2016 for CCEP include:

--Low single digit top line growth on a currency neutral basis expected in 2016 and 2017;

--Dividend payout in 2017 of 35% of net income;

--No material share repurchases in 2016 or 2017;

--FCF generation (CFFO less capital spending less dividends) of approximately $350 million in 2017 with FCF margin in the range of 3-4% over the longer-term;

--CCEP's pro forma gross leverage at transaction close in the upper 3x range, with leverage declining to under 3.0x by end of 2017 due primarily to debt reduction.

RATING SENSITIVITIES

Fitch does not expect a positive rating action based on CCEP's current leverage and financial policies. Future developments that could, individually or collectively, lead to a positive rating action include:

--Gross debt-to-operating EBITDA consistently in the low 2.0x range or net leverage below management's targeted range of 2.5x-3x due to operating income growth and continued strong FCF generation that results in debt reduction;

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

--Gross debt-to-operating EBITDA sustained above 3x that could be driven by:

--Persistent declines in volumes concurrent with material margin compression and significantly lower FCF and EBITDA given mature economies and persistent macroeconomic headwinds, as well as an accelerated shift in consumer purchasing preferences away from carbonated soft drinks;

--Change in financial policy that result in material debt-financed share repurchases or special dividends.

LIQUIDITY

CCE had good liquidity of approximately $1 billion at the end of the first quarter 2016, inclusive of $279 million of cash and an undrawn $1 billion multi-currency credit facility. The credit facility backstops CCE's commercial paper (CP) program that had $320 million outstanding.

After closing, CCEP will have a EUR1.5 billion five-year multicurrency revolving credit facility (RCF) with an option to increase the RCF size by EUR500 million and extend by 12 months on two separate occasions upon consent by lenders. CCEP is expected to maintain cash levels in the $200 million to $300 million range. Expectations are for CCEP to establish a dividend pay-out of net income in the 30% - 40% range with FCF margins in the range of 3% - 4% once a dividend has been established. CCEP has indicated that the company will refrain from material share repurchases until leverage is back to the lower end of its net leverage target range of 2.5x to 3.0x by 2017. Long-term debt maturities are manageable and include US$250 million in 2016 and EUR350 million of legacy CCE debt in 2017.

FULL LIST OF RATING ACTIONS

Fitch affirms the ratings for Coca-Cola Enterprises Inc. as follows:

--Long-Term IDR at 'BBB+';

--Senior unsecured notes at 'BBB+'.

Fitch has affirmed and withdrawn the following ratings:

--Bank credit facility 'BBB+';

--Short-Term IDR 'F2';

--CP 'F2'.

Fitch has withdrawn CCE's bank credit facility, short-term IDR and CP ratings since CCEP will establish a CP program and EUR1.5 billion RCF.

The Rating Outlook is Stable.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

-- No material adjustments have been made that have not been disclosed in public fillings of this issuer.

Disclosure: Veronique Morali, Vice Chairman of Fitch Group, Inc. and a member of its board, is also a member of the board of Coca-Cola European Partners. Ms. Morali does not participate in any Fitch rating committees, including that of Coca-Cola Enterprises, Inc. or Coca-Cola European Partners.

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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005351

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005351

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Contacts

Fitch Ratings
Primary Analyst
William Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
William Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com