House & Home
House and HomeHouse and Home 
Thu, August 18, 2011
Wed, August 17, 2011
Fitch Affirms CCE's IDR at 'BBB+'; Rates New Notes 'BBB+'
CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed Coca-Cola Enterprises, Inc.'s (NYSE: CCE) ratings, as well as those of Coca-Cola Enterprises (Canada) Bottling Finance Company. See the full list of ratings at the end of this release.
In addition, Fitch has withdrawn the Issuer Default Rating (IDR) of Coca-Cola Enterprises Finance LT1 Commandite S.C.A., since the entity will no longer be used by CCE to issue debt.
The Rating Outlook is Stable.
In conjunction with this action, Fitch rates CCE's new $250 million 5-year 2.0% and $250 million 10-year 3.25% senior unsecured notes 'BBB+'. The new notes will be issued by the parent company Coca-Cola Enterprises, Inc. and will rank pari passu with the company's senior unsecured indebtedness. The notes are being issued under the company's indenture dated Sept. 14, 2010. Significant covenants include, but are not limited to, limitations on liens and restrictions on sale-leaseback transactions. CCE expects to use the net proceeds of this offering for general corporate purposes, including share repurchases and refinancing of commercial paper. The notes are callable by CCE subject to a make-whole provision. CCE had approximately $2.8 billion of debt as of July 1, 2011. Fitch expects CCE will use part of the proceeds to repay commercial paper.
Rating Rationale
The ratings reflect CCE's exclusive right to manufacture, sell and distribute Coca-Cola brand beverages within its territories in Western Europe. CCE has a 10-year contract with The Coca-Cola Company for distribution within the territories with automatic renewal assuming certain benchmarks are attained. CCE has not had difficulties meeting agreed upon benchmarks outlined in the agreement. Ninety percent of CCE's sales are Coca-Cola Company products which enjoy superior market share positions.
CCE's ratings are supported by the company's free cash flow (FCF) generation which is enabled by its healthy operating margins. Fitch expects 2011 FCF (defined as Cash Flow from Operations less Capital Expenditures and Dividends) between $300 million and $400 million, which is meaningful. EBITDA margin for the latest 12 months ended July 1, 2011 has declined to 15.6% from 16.0% for the year ended Dec. 31, 2010 on higher input costs, but remains robust.
CCE's stated leverage target of net debt-to-EBITDA of 2.5 times (x) to 3.0x is factored into the rating as well as Fitch's expectation that CCE will meet and maintain its target. To date, CCE has operated below its target range.
Uncertainty surrounding the funding of the potential acquisition of the German bottler from The Coca-Cola Company is also a factor in the ratings. CCE gained the right to purchase at fair value Coca-Cola Erfrischungsgetraenke AG in an 18- to 39-month time period from the transaction announcement date, the start of which would coincide with the end of August 2011. While a fair value has yet to be determined, it is expected to be significant. As a point of reference, the population of Germany is approximately 82 million, and CCE's territory covers roughly 165 million consumers.
Key Rating Drivers
--Maintaining lower leverage than targeted in combination with a stated commitment to a lower leverage range could result in a positive rating action.
--Coca-Cola acquiring a significant equity stake in CCE would also be a positive.
--Negative rating pressure could result from the following: carbonated soft drink volume declines without offsetting gains in growing beverage categories, margin declines due to competitive pressures, and/or more aggressive financial policies.
--Leverage greater than the company's target range due to the acquisition of the German bottler without an expectation of improved credit metrics 12- to 18-months post-transaction would be negative for the rating.
Performance
While Europe is certainly under economic pressure, CCE's exposure to European crisis economies is limited. For several quarters, CCE has been able to grow volume on balance throughout its European territories. Further, CCE has a dominant market position. Coca-Cola products have the number 1 share in non-alcoholic ready-to-drink beverages in CCE's territories by a large margin. This enables CCE to be able to price without significant competitive fears. In fact CCE is taking pricing to cover the run-up in PET resin prices. The prices are sticking as evidenced by ongoing volume growth.
CCE's credit metrics are in line with Fitch's expectations. Appreciation in the Euro versus the dollar has added a tailwind to CCE's dollar-denominated EBITDA results. In addition, most of their debt is issued in U.S. dollars. This results in a currency mismatch which affects certain credit metrics. Total debt to EBITDA was 2.3x at July 1, 2011, which is up slightly from 2.1x at Dec. 31, 2010. Gross interest to EBITDA ticked down to 16.7x from 17.1x on higher debt balances. Funds from operations (FFO) adjusted leverage was flat at 3.2x. CCE has a net debt to EBITDA target of 2.5x to 3.0x, which they are below. As of July 1, 2011, CCE's net debt to EBITDA was 2.0x.
The increase in leverage on a total debt to EBITDA basis from Dec. 31, 2010 to July 1, 2011 was anticipated as CCE funded share repurchases with debt with a goal of optimizing its capital structure. As of July 1, 2011, CCE executed $600 million of share repurchases on its $1 billion authorization. Fitch expects CCE would become more conservative on stock buybacks if the company uses a significant amount of debt to finance its acquisition of the German bottler.
Liquidity and Debt Structure
CCE has plenty of liquidity. The company has no borrowings under a four-year revolving credit facility which expires Aug. 26, 2014. CCE also has $404 million of cash as of July 1, 2011. CCE does not have a maturity until March 13, 2013 when its 200 million Swiss Franc notes guaranteed by Coca-Cola Refreshments USA, Inc. (IDR: rated 'A+' by Fitch) come due. CCE generates meaningful FCF. CCE's European business has generated an average of $450 million of FCF over the past four years, but most of that time does not include dividends which CCE now pays. Fitch estimates CCE will pay roughly $160 million to $170 million in dividends this year. Offsetting the dividends is the addition of Norway and Sweden territories which CCE purchased from The Coca-Cola Company for $822 million.
The guaranteed unsecured notes rating of Coca-Cola Enterprises (Canada) Bottling Finance Company is based on The Coca-Cola Company's wholly owned subsidiary Coca-Cola Refreshments USA, Inc.'s IDR of 'A+'. Coca-Cola Refreshments USA, Inc. purchased Legacy CCE's U.S. bottling operations on Oct. 3, 2010. The Coca-Cola subsidiary inherited the guarantee of these notes as the transaction was structured as an acquisition and a spin-off with the Coca-Cola subsidiary acquiring the legal entity which guarantees the notes.
Fitch affirms the following ratings:
Coca-Cola Enterprises, Inc.
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Bank credit facility at 'BBB+';
--Senior unsecured notes at 'BBB+';
--Commercial paper at 'F2'.
Coca-Cola Enterprises (Canada) Bottling Finance Company
--Long-term IDR at 'BBB+';
--Guaranteed senior unsecured notes at 'A+'.
Additional information is available at '[ www.fitchratings.com ]'.
Disclosure: Veronique Morali, vice chairman of Fitch Group, Inc. and a member of its board, is also a member of the board of Coca-Cola Enterprises, Inc. Ms. Morali does not participate in any Fitch rating committees, including that of Coca-Cola Enterprises, Inc.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 16, 2010;
--'Parent and Subsidiary Rating Linkage', dated July 14, 2010.
Applicable Criteria and Related Research:
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]
Parent and Subsidiary Rating Linkage
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210 ]
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '[ WWW.FITCHRATINGS.COM ]'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.