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Rating Action: Moody's affirms Coca-Cola European Partners' A3/P-2 ratings; stable outlook
Global Credit Research - 13 Aug 2020
Milan, August 13, 2020 -- Moody's Investors Service, ("Moody's") has today affirmed the A3 long term issuer rating and the senior unsecured rating 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 company's Prime-2 (P-2) short-term rating. The outlook is stable.
"The affirmation takes into account CCEP's strong business profile and the resilient fundamentals of the beverage industry in times of economic stress, which are the key mitigating factors to the expected decline in profits in 2020," says Ernesto Bisagno, a Moody's Vice President -- Senior Credit Officer and lead analyst for CCEP.
"The rating affirmation also reflects Moody's expectation that the company will maintain a financial policy that balances creditor protection and shareholder remuneration in the current uncertain environment, and that market conditions and CCEP's performance will recover in 2021," adds Mr. Bisagno.
A full list of affected ratings is provided at the end of this press release.
CCEP's A3 rating benefits from a one-notch rating uplift, reflecting the implied support from Coca-Cola Company (The) ("TCCC", A1 stable).
CCEP's standalone credit profile reflects the company's strong business profile and the resilient fundamentals of the beverage industry in times of economic stress, the key mitigating factors for the expected decline in profit in 2020 and the expected weakening of CCEP's credit metrics.
Despite the expected deterioration in profit in 2020, the A3 rating is supported by (1) CCEP's strong brand portfolio and market shares as the largest independent bottler in the Coke system; (2) steady profit growth and strong cash flow generation; and (3) balanced financial policy, with a medium-term targeted leverage of 2.5x-3.0x (company's definition of net debt to adjusted EBITDA). CCEP's rating is constrained by (1) its exposure to the low-growth environment across Europe, and (2) track record of significant shareholder distributions, although the company has recently suspended its share buyback until visibility recovers.
In 2019, CCEP reported a 4.5% (3.5% excluding incremental soft drinks taxes) revenue increase excluding forex movements and a 6% increase in comparable operating profit to E1.7 billion, driven by a combination of increased volumes, higher pricing and better mix.
In March 2020, the company withdrew its original guidance for 2020 whereby operating profit was expected to grow in the mid-single-digit range. This was because of the weakened economic outlook due to the widening spread of the coronavirus outbreak in CCEP's key markets. As a result, in the first half of 2020, CCEP reported net revenue and comparable operating profit down 16.5% and 48.5%, due to a sharp decline in volumes in the away-from-home channel, a more modest decline in home consumption, and increased cost of sales per unit case due to the relatively high amount of fixed costs in its cost structure. This was partially offset by a reduction in operating costs. However, since the full lock down measures were lifted, the decline in volumes have started to ease, with the company indicating that July volumes were in line with June.
Assuming that the efforts to contain the spread of coronavirus are successful and there are no further widespread lockdowns, Moody's expects additional sequential improvement in trading performance in the second half. Despite the sequential improvement in H2, Moody's expects CCEP to report a 25%-30% decline in 2020 Moody's adjusted EBITDA.
However, Moody's anticipates free cash flow (FCF) after interest and dividends paid to remain broadly neutral in 2020, or marginally positive, supported by E200 million - E250 million of discretionary cost savings and a E200 million reduction in capex. Pressures on 2020 credit metrics will also be offset by the company's decision to suspend its E1 billion share buyback programme.
Return to profit growth in 2021 will be driven by a significant improvement in volumes from what will be a low base in 2020 and by CCEP's continued focus on higher-margin premium products.
Based on that, the rating agency expects CCEP's Moody's-adjusted debt/EBITDA to increase towards 4.0x, higher than the 3.0x threshold for the current A3 rating, and to return towards 3.0x by 2022.
The biggest risks to Moody's expectations includes a material increase of cases which could trigger new lockdowns, as well as a prolonged economic contraction or a weak recovery, resulting in a shift to buying cheaper products with lower margins. Profit recovery would also be at risk if there were a permanent shift in consumption, resulting in permanently lower sales volumes.
CCEP's liquidity is excellent, underpinned by existing cash and cash equivalents of E893 million at June 2020; neutral-to-marginally positive FCF after interest and dividends paid over 2020-21; and access to a E1.5 billion revolving credit facility (fully undrawn as of December 2019) maturing in August 2025 and not subject to any financial covenants or material adverse changes at drawings.
The company has a manageable debt maturity schedule, with around E338 million equivalent bond due in September 2020, and E744 million equivalent of bonds maturing in 2021.
Consistent with higher summer demand, CCEP's second and third quarters typically contribute over 60% of annual earnings and operating cash flow. Working capital also exhibits moderate seasonality, with a buildup in the first half of the year.
RATIONALE FOR STABLE OUTLOOK
Despite the expected decline in earnings, the stable outlook reflects Moody's expectation that CCEP will continue to generate neutral to marginally positive free cash flow over 2020-21, and that the company may use additional levers at its disposal to protect its credit metrics in case operating performance deteriorates further. However, the rating agency expects CCEP Moody's adjusted leverage to remain above the level required for the rating in the next 12-18 months and only return towards 3.0x by 2022.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the relatively high leverage, an upgrade of CCEP's ratings is unlikely in the next 12-18 months. However, upward rating pressure could develop if operating momentum is strong and the company commits to sustaining debt/EBITDA closer to 2x.
CCEP's rating could be strained if its operating performance does not show signs of improvement in 2021 and Debt/EBITDA does not return towards 3.0x by 2022.
LIST OF AFFECTED RATINGS
..Issuer: Coca-Cola European Partners plc
....Long-term Issuer Rating, Affirmed A3
....Commercial Paper, Affirmed P-2
....Senior Unsecured Regular Bond/Debenture, Affirmed A3
....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A3
Outlook Action: ....Outlook, Remains Stable PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Soft Beverage Industry published in January 2017 and available at https://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.
CCEP 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, 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 2019, the company reported sales and EBITDA of E12.0 billion and E2.2 billion, respectively. The Coca-Cola Company has a 19% interest in CCEP, principals of the former Coca-Cola Iberian Partners own 36% and the rest is publicly traded.
For 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_1133569.
Please 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.
Ernesto Bisagno, CFA VP - Senior Credit Officer Corporate Finance Group Moody's Italia S.r.l Corso di Porta Romana 68 Milan 20122 Italy JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Ivan Palacios Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Italia S.r.l Corso di Porta Romana 68 Milan 20122 Italy JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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