DBRS Removes PepsiCo from UR-Neg, Downgrades by One Notch

DBRS has today lowered the Senior Unsecured Debt and Commercial Paper ratings of PepsiCo, Inc. (PepsiCo or the Company) by one notch to A (high) and R-1 (low), respectively, and removed the ratings from Under Review with Negative Implications, where they were placed on April 20, 2009. The rating action primarily takes into account PepsiCo’s more aggressive financial profile following its acquisitions of The Pepsi Bottling Group, Inc. (PBG) and PepsiAmericas, Inc. (PAS). Additionally, the Company has resumed share repurchase activity that will likely delay an improvement in its credit metrics to levels more compatible with its previous ratings. The ratings are Stable as the Company’s operating performance is expected to improve over the near to medium term and its business risk profile has modestly strengthened from the aforementioned acquisitions. The ratings for PepsiCo Canada ULC, PBG and Bottling Group LLC have also been removed from Under Review and aligned with PepsiCo’s (details below).

DBRS views PepsiCo’s acquisition of its two largest bottlers as being positive from a business profile perspective but the Company’s financial risk profile is no longer commensurate with the previous ratings. Debt has materially increased mainly as a result of the consolidation of PAS and PBG and funding of the acquisition. In addition, the Company initiated a $15 billion new share repurchase program (through to June 2013) despite much higher debt levels, of which a large share will likely be funded with debt in 2010 (PepsiCo anticipates share buybacks of roughly $4.4 billion during the year).

PepsiCo credit metrics materially declined in Q1 2010 following the closing of the bottler transactions relative to 2009 and historical average levels. Debt has increased to close to $22 billion (from roughly $8 billion at end-2009), which includes roughly $7.8 billion in PBG and PAS debt (of which $2.3 billion was previously guaranteed by PepsiCo and included in its credit metrics). DBRS estimates that debt-to-EBITDA will remain in the 2.0 times range (from roughly 1.1 times at end-2009) and cash flow-to-debt will drop to the 40% range (from 67%) going forward. PepsiCo is expected to generate growth in earnings and cash flow over the near to medium term. However, given the focus on shareholder-friendly initiatives and acquisitions as opposed to debt repayment, the Company's credit metrics are unlikely to be restored to pre-bottler acquisition levels. DBRS had previously indicated that a return to historical credit metrics over the next 12 to 18 months had the potential to keep the long-term and commercial paper ratings intact, but this is not expected.

The current ratings are expected to remain Stable. The consolidation of PBG and PAS provide PepsiCo with a fully-integrated supply chain and control of roughly 85% of its North American beverage volume distribution. Manufacturing and distribution efficiency, along with new packaging and product innovation, are expected to improve. Importantly, the potential synergies should offset the impact of the Company absorbing a lower-margin, more capital intensive bottling business. In addition, PepsiCo remains a market leader within its core business segments, and possesses strong brands and geographic diversification, all of which continue to lend support to the ratings. Growth in international markets, PepsiCo’s higher margin/growth snack portfolio and its solidly profitable, albeit more mature, beverages operations largely support the earnings and cash flow outlook.

DBRS notes that in conjunction with the above rating actions, DBRS has also removed the ratings for PBG and Bottling Group LLC from their Under Review status. The Senior Unsecured Debt ratings guaranteed by PepsiCo have been downgraded to A (high) from AA (low) and the non-guaranteed debt has been confirmed at A (high). PBG’s Commercial Paper rating has been discontinued as the Company has terminated the program and will not issue PBG commercial paper going forward. The PBG and Bottling Group LLC Senior Unsecured Debt ratings are now aligned with those of PepsiCo, regardless of the fact that only $2.3 billion in PBG debt is guaranteed by the Company. Given that PBG is now 100% owned and viewed as core to PepsiCo’s operations, DBRS believes that the Company would support PBG under all circumstances and hence, the lack of a guarantee no longer warrants a rating differential.

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

PepsiCo Canada ULC’s Commercial Paper is guaranteed by PepsiCo, Inc.

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

This is a Corporate rating.