The notes will be issued by PepsiCo, Inc. and will rank equally with PepsiCo's senior unsecured obligations. Significant covenants include limitations on secured debt and conditions related to consolidation, mergers or the sale of assets. PepsiCo is not bound by any financial covenants. The notes are callable by PepsiCo subject to a make-whole provision.
KEY RATING DRIVERS
PepsiCo's ratings reflect its considerable financial flexibility, substantial cash flow, significant scale, product diversification, increasing exposure to faster growing emerging markets, and position as the world's second largest food and beverage company. PepsiCo's
PepsiCo's brand strength is demonstrated by its portfolio that consists of 22 brands; including Pepsi,
PepsiCo's financial strategy, historically viewed as aggressive, is also factored into ratings. PepsiCo, which has experienced pressure from an activist investor, has indicated plans to grow overall shareholder returns for 2014 in excess of
PepsiCo's challenges include global concerns with health and wellness trends, increased taxes, mature developed markets and sentiment toward artificial sweeteners that grew increasingly negative during 2013 with diet CSD declines accelerating in the U.S. Several of PepsiCo's developed markets are more mature with stagnant or declining per capita consumption trends, weak economies and/or low population growth. This places more dependence on growth in emerging markets and on new product innovation thus likely increasing the firm's longer-term operating risk.
Notably, PepsiCo maintains a good breadth of products across its beverage segment with strong positions in its non-carbonated soft drinks to balance the declines within its CSD portfolio. However, PepsiCo and the rest of the industry must successfully develop new beverage products that are healthier, natural sweetener based with lower calorie options to evolve their portfolios. Fitch anticipates that innovation will not fully ameliorate the continued declines in some developed markets due to changing habits that are causing some consumers to leave the carbonated soft drink category for healthier options.
Operationally, PepsiCo is focused on increasing brand support to grow market share, expanding its emerging market presence, growing its nutrition business, reducing overhead, and leveraging technology and processes across its organization. PepsiCo has made noticeable progress on this strategy therefore Fitch believes PepsiCo's strategic initiatives should help the company improve trends. Furthermore, PepsiCo announced an incremental five-year
Global brand building efforts have helped offset beverage volume declines in
For 2013, total debt-to-operating EBITDA was 2.3x, operating EBITDA-to-gross interest expense was 14.1, and FFO adjusted leverage was 3.4x. PepsiCo's leverage is modestly higher than similarly rated food and beverage companies but ratings are supported by, as mentioned previously, the company's substantial and stable FCF, significant scale, diversification, and brand leadership. Fitch believes downside ratings risk is present if PepsiCo further increases debt to fund higher shareholder returns.
Fitch's ratings reflect expectations that total debt-to-operating EBITDA leverage will rise to the 2.4x to 2.5x range for 2014 which further reduces flexibility at its current rating. PepsiCo's cash flow growth should benefit from its strategic initiatives around brand support and productivity as savings are realized. PepsiCo's 2014 operating cash flow will not be materially affected by pension and retirement medical plan contributions. PepsiCo U.S. pension is well-funded at approximately 97% as the company expects to make global contributions of approximately
Liquidity, Covenants, and Maturities:
PepsiCo maintains good liquidity. At the end of 2013 the firm had
PepsiCo guarantees all of the senior notes of its bottling subsidiaries -
Future developments that may, individually or collectively, lead to a positive rating action include:
--Total debt-to-operating EBITDA below 2.0x and Fitch's belief that PepsiCo would manage its balance sheet to sustain an 'A+' rating. Currently, Fitch does not view this as likely given increased shareholder returns.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Significant debt-financed acquisitions and/or deteriorating operating performance that causes total debt-to-operating EBITDA to be sustained above the mid- 2.0x level;
--Substantial and sustained declines in cash flow would also likely prompt negative rating actions;
--Financial policy changes including higher level of share repurchases or dividends that would increase financial leverage.
Fitch's currently rates PepsiCo as follows:
--Long-term Issuer Default Rating (IDR) 'A';
--Senior unsecured debt 'A';
--Bank credit facilities 'A';
--Short-term IDR 'F1';
--Commercial paper program 'F1'.
--Long-term IDR 'A';
--Guaranteed senior notes 'A'.
--Long-term IDR 'A';
--Guaranteed senior notes 'A'.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
Source: Fitch Ratings
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