DBRS Comments on Coca-Cola Enterprises Inc.’s $2.3 Billion Non-Cash Writedown

DBRS notes that its ratings and trends on Coca Cola Enterprises Inc. (CCE or the Company) and The Coca-Cola Company (Coke) are unchanged following CCE’s announcement today that it has recorded a $2.3 billion non-cash impairment charge to reduce the value of the Company’s North American franchise license intangibles. The Senior Unsecured Debt ratings for CCE and Coke are “A” and AA (low), respectively, and the Commercial Paper ratings are R-1 (low) and R-1 (middle), respectively. The trends are Stable.

The writedown is the result of CCE’s annual impairment analysis in accordance with SFAS No.142 and was necessary to reduce the book value of the Company’s North American franchise license intangibles to their estimated fair market value. The book value of CCE’s North American franchise license intangibles has now been written down to zero, following today’s announcement and previous writedowns in July 2008 ($5.3 billion) and February 2007 ($2.9 billion). Notwithstanding the magnitude of the writedowns, the ratings and trend remain unaffected based on the strong business profile and financial metrics of the overall Coke system (The Coca-Cola Company together with its key bottlers – CCE, Hellenic, FEMSA and Amatil); the non-cash nature of the writedowns; and CCE’s stable cash flow generation and financial profile.

For the year ended December 31, 2008, CCE realized operating income of $1.33 billion (excluding non-cash impairment charges of $7.6 billion), compared with $1.47 billion in F2007, a decrease of 10%. Fiscal 2008 results were in line with guidance and reflected softness in CCE’s North American markets (lower volumes and higher commodity costs). Despite the decrease in operating earnings, CCE continued to generate strong free cash flow ($655 million) and reduce debt (gross debt was $9.0 billion at December 31, 2008, compared with $9.4 billion for the prior year).

While DBRS expects that earnings will benefit from lower commodity costs and the pricing actions taken by CCE over the last few months, the weak global economy will continue to keep demand soft in F2009, resulting in lower earnings. That said, the Company continues to expect free cash flow of approximately $600 million for F2009, the majority of which should be applied to debt reduction, thus keeping the Company’s financial profile relatively stable. DBRS expects that earnings and cash flow will begin to recover in F2010 as market conditions improve.

With approximately 93% of CCE’s production volume related to Coke licensed products, CCE’s business profile and ratings remain implicitly supported by the strength of Coke and the Coke system. Coke continues to generate improved operating performance. For the nine months ended September 28, 2008, Coke displayed solid volume growth of 4%, revenue growth of 15% and operating income growth of 18%. Strong performance continues to be driven by Coke’s improving geographic diversification, marked by strong growth in Asia, Latin America, Eurasia and the Pacific region. In addition to strong operating performance at Coke, debt continues to reduce at the key bottling companies, keeping the financial profile of the Coke system as a whole relatively steady.

With the risk profile of the Coke system intact, DBRS believes the softness in CCE’s near-term performance is not material to the ratings. A decline in the overall performance of the Coke system or material debt-financed acquisitions or share repurchases that result in a meaningful increase in leverage for the Coke system could, however, lead to pressure on all of the ratings. As well, DBRS notes that a continued decline in CCE’s individual performance, which could materially affect the Company’s financial flexibility, could potentially result in pressure on CCE’s individual ratings.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Consumer Products which can be found on our website under Methodologies.

This is a Corporate rating.