DBRS Confirms The Coca-Cola Company at A (high), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of The Coca-Cola Company (Coke or the Company) at A (high) and the Short-Term Issuer Rating at R-1 (low), all with Stable trends. The ratings continue to reflect Coke’s dominant global market position in the beverages sector supported further by its scale and strong distribution network. The ratings recognize an intense competitive environment and the mature nature of developed markets. The ratings also reflect the Company’s strong cash generation and robust liquidity, while considering the Company’s increasing financial leverage.

Despite a growth in consolidated volumes and the favorable impact of price mix, consolidated revenues in H1 2015 decreased by approximately 1% compared with H1 2014, primarily because of the negative impact of foreign exchange fluctuations. As such revenue reported in H1 2015 was $ 22.9 billion ($283 million lower than revenue in H1 2014).

Coke’s financial profile benefits from its consistent cash flow generation and robust liquidity. However, DBRS is concerned about the Company’s financial leverage which has been increasing steadily over the past three years. Coke’s increasing financial leverage is in part a consequence of a low interest rate environment driving the Company’s relatively aggressive financial practice of using debt to supplement free cash flow for strategic acquisitions, investments, and share repurchases. DBRS notes that the Company’s gross financial leverage (Gross debt to EBITDAR) has gradually crept up to a relatively high level of 3.6 times (x) in H1 2015 from about 2.9x at the end of 2013. That said, the Company’s cash generation has remained steady. Coke’s cash flow from operations over the last 12 months ending H1 2015 was relatively strong at $12.3 billion ($11.9 billion in 2014).

Going forward, DBRS expects Coke’s earnings profile to remain stable based on the Company’s brand strength and its global marketing and innovation efforts pursuant to its productivity and reinvestment program. Over the near term, DBRS expects the Company to achieve low single digit growth in consolidated volumes. However, foreign currency headwinds will continue to impact Coke unfavorably, causing modest declines in its revenue in this period. Coke is expected to maintain its operating (EBITDA) margin in the 26% to 27% range; however, operating income should track its revenue and is expected to experience a modest decline over the near term. As such, the Company’s EBITDA in 2015 is expected to be approximately $12 billion.

The Company’s relatively strong cash generation and robust liquidity are expected to support DBRS’s stable outlook for Coke’s financial risk profile. DBRS believes the Company will continue with its chosen practice to borrow funds domestically to supplement free cash for investments, acquisitions and share repurchases. DBRS will continue to monitor the Company’s debt levels and its financial leverage and further meaningful deterioration in the metric may put the current rating under pressure for a negative action.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Consumer Products Industry (August 2015), which can be found on our website under Methodologies.

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