DBRS Morningstar Changes the Trend on The Coca-Cola Company’s Issuer Rating to Negative from Stable

DBRS Limited (DBRS Morningstar) changed the trend on The Coca Cola Company’s (Coke or the Company) Issuer Rating to Negative from Stable and confirmed the rating at A (high). DBRS Morningstar also confirmed the Company’s Short-Term Issuer Rating at R-1 (low) with a Stable trend. The trend change reflects DBRS Morningstar’s expectations that Coke’s near-term earnings will be negatively affected by the Coronavirus Disease (COVID-19) pandemic and that its earnings profile will remain pressured in the near to medium term due to a weaker macroeconomic environment and, in particular, a weaker consumer. As such, DBRS Morningstar is concerned that the business risk profile and corresponding key credit metrics could deteriorate beyond the level considered appropriate for the current rating category.

On March 13, 2020, DBRS Morningstar confirmed Coke’s Issuer and Short-Term Issuer Ratings, both with Stable trends. The rating confirmations were supported by the combination of solid growth in operating income and debt repayment, which resulted in an improvement in leverage to a level more appropriate for the current ratings (i.e., below 4.0 times (x)). At that time, DBRS Morningstar forecast F2020 EBITDA to increase to $12.4 billion, in line with revenue growth, and leverage was expected to improve modestly to 3.6x by the end of F2020.

Since then, DBRS Morningstar’s outlook on Coke’s earnings has weakened as a result of the coronavirus pandemic and its related macroeconomic effects.

In F2020, Coke’s topline will be pressured by the contraction in demand from the away-from-home channel (which contributes approximately half of the Company’s revenue) due to the restrictions placed on on-site dining and the cancellation of entertainment, sporting, and other events, which will more than offset revenue growth from the at-home and e-commerce channels. Adverse foreign currency fluctuations could further soften the topline. DBRS Morningstar expects the shift in demand to at-home consumption to have an adverse knock-on impact on operating income and EBITDA margins. This could more than offset the benefits from cost savings and productivity improvement initiatives. Any unfavorable foreign currency fluctuations could further pressure margins. DBRS Morningstar believes that the pressure on earnings will likely persist into F2021 due to a weaker macroeconomic environment, and, in particular, a weaker consumer.

The decline in operating income and corresponding cash flow will weaken Coke’s financial profile and key credit metrics. DBRS Morningstar does not expect Coke to generate a material amount of free cash flow in the near term that could be applied to debt reduction. This view is based on DBRS Morningstar’s expectation that operating cash flows will contract and will likely be absorbed by capital expenditure and shareholder dividends. As such, leverage is expected to deteriorate beyond the 4.0x level considered appropriate for the current A (high) Issuer Rating in the near term, and could remain at these levels in the medium term. While the Company could use capital conserving measures to defend credit metrics through debt reduction, the revision of the trend to Stable would be more influenced by stabilization and recovery in operating income rather than debt reduction. However, if key credit metrics remain pressured because of a continued decline in operating income, DBRS Morningstar could downgrade Coke’s ratings.

Coke’s current ratings continue to be supported by its strong brands, solid market positions and geographic diversification, as well as its large size, scale, and efficient operations. The current ratings also consider the intense competitive environment, the Company’s mature core markets and product categories, and ongoing changes to consumer preferences.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Consumer Products Industry (August 15, 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at [email protected].

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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