Coca-Cola European Partners plc -- Moody's downgrades Coca-Cola European Partners' ratings to Baa1 following acquisition of CCA; stable outlook

Rating Action: Moody's downgrades Coca-Cola European Partners' ratings to Baa1 following acquisition of CCA; stable outlookGlobal Credit Research - 19 Apr 2021Milan, April 19, 2021 -- Moody's Investors Service ("Moody's") has today downgraded to Baa1 from A3 the long-term issuer rating and the senior unsecured debt instrument ratings of Coca-Cola European Partners plc ("CCEP" or "the company"), the largest independent bottler by revenue in the Coke system. Concurrently, Moody's has affirmed the Prime-2 (P-2) short-term rating. The outlook has been changed to stable from ratings under review.The rating action follows the announcement on 16 April 2021 [1] that the independent shareholders of Coca-Cola Amatil Limited ("CCA", A3 on review for downgrade) have voted in favour of the proposed Scheme of Arrangement pursuant to which all of the shares held will be acquired by CCEP for a total of A$6.8 billion (E4.4 billion). Coca-Cola Company (The) ("TCCC", A1 stable), which owns the remaining 30.8% stake, will receive A$9.57 per share in cash for 10.8% of CCA's shares and A$ 10.75 per share for the remaining 20% stake.This rating action concludes the review for downgrade initiated on 26 October 2020, when CCEP announced a non-binding bid to acquire CCA."The downgrade to Baa1 from A3 reflects the significant debt that CCEP will incur in to fund the acquisition of CCA, which will result in a material increase in leverage and a deterioration in credit metrics," says Ernesto Bisagno, a Moody's Vice President - Senior Credit Officer and lead analyst for CCEP."While the rating is initially weakly positioned in the Baa1 category, the stable outlook reflects our expectation that CCEP will delever towards 4.0x by 2023 from 5.6x in 2021," added Mr Bisagno.A full list of affected ratings can be found at the end of this Press Release.RATINGS RATIONALEThe rating downgrade reflects the deterioration in CCEP's credit metrics following the acquisition of CCA for E5.9 billion, in addition to net debt at the target company of E1 billion, which implies an enterprise value of approximately E6.9 billion (EV/EBITDA of 11.4x based on 2020 Moody's CCA adjusted EBITDA).Pro forma for the acquisition, the rating agency expects that CCEP's Moody's adjusted leverage at December 2021 would increase to approximately to 5.6x from 4.5x CCEP standalone based on the full year 2020 results. Moody's expects leverage to decline towards 4.0x by 2023, leaving the company weakly positioned in the rating category.Moody's has factored into its decision to downgrade CCEP's ratings the governance considerations associated with the company's financial strategy and risk management. The deterioration in CCEP's financial profile reflects a more aggressive financial policy which indicates a higher leverage tolerance. This is partially offset by the company's public commitment to deleverage towards 2.5x-3.0x (company's definition of net debt to adjusted EBITDA).While the acquisition of CCA will weaken CCEP's financial profile, it will almost double its consumer reach creating a broader footprint with exposure to the mature markets of Australia and New Zealand, growth markets such as Indonesia and the potential to expand into new geographies in Asia. In addition, it will enhance CCEP's portfolio diversification given CCA's exposure to alcohol and coffee products. However, a large part of the increased consumer reach comes from regions where consumption rate is currently lower than in CCEP's existing markets.The acquisition of CCA also entails a degree of execution risk reflecting the merger of non-contiguous territories and the structural changes of the Australian market, which is mitigated by management's strong track-record in integrating assets, as CCEP was formed through the merger of three European bottlers (Coca-Cola Enterprises, Inc., Coca-Cola Iberian Partners S.A.U., and Coca-Cola Erfrischungsgetränke AG) in 2016. In addition, following the acquisition there is also potential for increased forex volatility, as around 20% of consolidated revenues will be generated in foreign currencies, while the majority of the debt to fund the transaction will be raised in Euro and US Dollar.In 2020, CCEP reported a 11.0% revenue decrease excluding forex movements and a 28.5% decrease in comparable operating profit to E1.2 billion, driven by a combination of a sharp decline in volumes in the away-from-home channel, and increased cost of sales per unit case due to the relatively high amount of fixed costs. This was partially offset by a modest improvement in home consumption and cost savings of around E260 million, ahead of the targeted E200 million-E250 million savings announced earlier in 2020.Despite weaker profits, Moody's adjusted free cash flow after shareholder distributions turned positive to E360 million owing to reduced capex, the suspension of the share buyback programme and lower dividends. Because of lower EBITDA, Moody's adjusted debt to EBITDA increased to 4.5x (excluding the E750 million raised in November to refinance 2021 maturities) from 3.0x in 2019.Moody's expects CCEP's profits to recover in 2021 driven by an improvement in volumes from a low base in 2020 and by the continued focus on higher-margin premium products. The pace of recovery will depend on the success of the efforts to contain the coronavirus pandemic. The vaccination of an increasing part of the population may lead to progressive reductions in the mobility restrictions affecting a number of CCEP's core markets.The rating agency expects CCEP's profits to return to 2019 levels by 2022. Given that the impact from the coronavirus pandemic in Australia and New Zealand was more modest than in Europe, Moody's expects 2021 CCA's profits to reach 2019 levels, one year ahead of CCEP. Pro-forma for CCA's contribution for the full year, Moody's expects that CCEP's free cash flow will improve towards E800 million by 2022, allowing room for deleveraging.CCEP's Baa1 rating benefits from a one-notch rating uplift, reflecting the implied support from TCCC. The Baa1 rating is supported by (1) CCEP's strong brand portfolio and market shares as the largest independent bottler in the Coke system; and (2) its steady profit growth and strong cash flow generation. CCEP's rating is constrained by (1) its high leverage following CCA's acquisition, (2) its exposure to the low-growth environment across Europe, Australia and New Zealand and demand volatility in emerging markets, and (3) the track record of significant shareholder distributions.LIQUIDITYCCEP's liquidity is excellent, underpinned by existing cash and cash equivalents of E1.5 billion at December 2020, positive FCF to increase towards E800 million by 2022 and access to a E1.5 billion revolving credit facility (fully undrawn as of December 2020) maturing in August 2025 and not subject to any financial covenants or material adverse changes at drawings.The acquisition of CCA will be funded through a committed E4.4 billion bridge facility to be refinanced in the capital markets, and a combination of existing cash and access to the CP market.The company has a manageable debt maturity schedule, with E729 million equivalent of bonds maturing in 2021.STRUCTURAL CONSIDERATIONSFollowing the completion of the acquisition, there will be modest structural subordination due to the E1.3 billion legacy debt sitting at CCA level, although Moody's did not deem this level to be material to notch down for structural subordination.RATIONALE FOR STABLE OUTLOOKWhile CCEP is weakly positioned in the Baa1 rating category due to the high initial leverage, the stable outlook assumes that the efforts to contain the spread of coronavirus will be successful, allowing a progressive normalization of the operating conditions in the company's core markets. Moody's expects that profits will start recovering in 2021 which will lead to a progressively improvement in credit metrics, with adjusted leverage returning towards 4.0x by 2023.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward rating pressure over medium-term is unlikely owing to the initial high leverage, but it could develop overtime if operating momentum is strong and Moody's adjusted debt/EBITDA declines towards 3x.Downward pressure on CCEP's rating could develop if its operating performance does not show signs of improvement in 2021 and Moody's adjusted Debt/EBITDA does not return towards 4.0x by 2023.LIST OF AFFECTED RATINGS..Issuer: Coca-Cola European Partners plcDowngrades, previously placed on review for downgrade:....LT Issuer Rating, Downgraded to Baa1 from A3....Senior Unsecured Regular Bonds/Debentures, Downgraded to Baa1 from A3....BACKED Senior Unsecured Regular Bonds/Debentures, Downgraded to Baa1 from A3Affirmation:....BACKED Commercial Paper, Affirmed P-2Outlook Action:....Outlook, Changed To Stable From Ratings Under ReviewPRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Global Soft Beverage Industry published in January 2017 and available at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1053179. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILECCEP was formed in May 2016 through the merger of three bottlers: Coca-Cola Enterprises, Inc., a producer, distributor and marketer of non-alcoholic beverages in Belgium, continental France, Great Britain, Luxembourg, Monaco, the Netherlands, Norway and Sweden; Coca-Cola Iberian Partners S.A.U., the Coca-Cola bottler for Spain, Portugal, Andorra and Iceland; and Coca-Cola Erfrischungsgetränke AG, which bottles, sells and distributes Coca-Cola branded products in Germany. In 2020, the company reported sales and EBITDA of E10.6 billion and E1.5 billion, respectively. The Coca-Cola Company has a 19% interest in CCEP, principals of the former Coca-Cola Iberian Partners S.A.U. own 36% and the rest is publicly traded.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Announcement published on CCA's website on 16-Apr-2021, https://www.ccamatil.com/getmedia/e3d7e23a-790f-49f3-b522-4c98892ebbfe/2200957.pdfPlease see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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