Coca-Cola’s ratings could be upgraded if the company demonstrate healthy growth at rates better than peers, sustain strong profitability, and make a commitment to reduce leverage at both Coca-Cola and the system.
The Coca-Cola Company, headquartered in Atlanta, Georgia, is the world’s largest manufacturer, marketer and distributor of nonalcoholic beverage concentrates and syrups. Coca-Cola goes to market through a network of bottlers. Moody’s analysis of Coca-Cola focuses on the strength of its system as a whole. To do this, Moody’s aggregates the financials of the concentrate producer (Coca-Cola) with its major rated bottlers. Coca-Cola has revenues of over $41 billion on a standalone basis, and system revenues of approximately $80 billion.
Moody’s has assigned an Aa3 rating to The Coca-Cola Company’s senior unsecured euro notes (2-year, 4-year, and 7-year tranches). All other ratings for the company remain unchanged. The outlook is stable and reflect its system’s leading position in the global carbonated soft drink (“CSD”) industry, including its ownership of one of the most valuable consumer brands in the world, a highly-diverse global operations network, a strong and growing non-carbonated portfolio, and unrivaled distribution. These strong qualitative factors are tempered by the company’s high gross leverage, the negative impact of currency translation on earnings, and higher absolute debt to fund shareholder returns in the past year.
Despite increasing gross leverage, net debt to EBITDA remains relatively modest given high cash balances, mostly held overseas. The company is also challenged by declining CSD consumption in some markets, slower economic growth expected from some key emerging markets, and headwinds in the global macroeconomic environment. 2017 will be a transformative year as the company refranchises its North American and certain international bottlers. This will shrink the company’s top line and operating profits, although profit margins will improve and cash flow will remain robust. Moody’s analyses The Coca-Cola Company by considering the strength of the system as a whole, which will have more modest changes as a result of the refranching.
Proposed €1.5b floating rate senior unsecured euro notes due 2019 at Aa3;
Proposed €0.5b senior unsecured euro notes due 2021 at Aa3;
Proposed €0.5b senior unsecured euro notes due 2024 at Aa3.
While unlikely given the current leverage expectations, Coca-Cola’s ratings could be upgraded if the company and system demonstrate healthy growth at rates better than peers, sustain strong profitability, and make a commitment to reduce leverage at both Coca-Cola and the system. Quantitatively, retained cash flow to net debt would need to approach 30%, and the company would need to sustain healthy cash flow and debt to EBITDA materially below 2.0 times on a system-wide basis before an upgrade would be considered.
Company’s ratings could be downgraded in the event of broad system operating weakness, large debt-funded acquisitions or shareholder returns, or failure to lower financial leverage over the next 12 to 18 months. Quantitatively, if debt to EBITDA remains materially above 2.5 times, net debt to EBITDA remains above 2 times, EBIT to interest falls materially below 6 times, or retained cash flow to net debt is sustained below 25% on a system wide basis, a downgrade would be considered.