CHICAGO - (Business Wire) Fitch has assigned an 'AA-' rating to PepsiCo's (NYSE:PEP) $1.75 billion 5.0% 10-year senior unsecured notes due June 1, 2018. Fitch affirms PepsiCo's ratings as follows:
--Issuer Default Rating (IDR) 'AA-';
--Bank credit facility 'AA-';
--Senior unsecured debt 'AA-';
--Short-term IDR 'F1+';
--Commercial paper (CP) 'F1+'.
The Rating Outlook is Stable. Approximately $6.0 billion of debt at Mar. 22, 2008 is affected by this rating action.
The affirmations reflect PepsiCo's diverse food and beverage product mix and its ability to consistently generate substantial operating cash flow. While PepsiCo is currently facing the challenges of commodity cost pressures and a weak U.S. economy, where it derives approximately 56% of its net revenue, the company continues to maintain its high operating margins, through productivity initiatives and effective pricing. Although PepsiCo's beverage portfolio includes several leading and faster growing non-carbonated brands, as the second largest player in the U.S. carbonated soft drink (CSD) market, the ratings consider the long-term CSD volume decline in the U.S. and other developed countries along with CSD price-elasticity.
To diversify geographically, PepsiCo has recently made several acquisitions outside North America. The company is using 'tuck-in' acquisitions and/or incremental capital expenditures to expand its presence in fast-growing international markets. Fitch will evaluate the merits of material acquisitions and monitor the funding of PepsiCo's expansion. A significant increase in PepsiCo's or the Pepsi system's leverage could negatively impact PepsiCo's credit rating.
For the twelve months ended Mar. 22, 2008, PepsiCo's credit statistics were in line with Fitch's expectations. Total debt-to-operating earnings before interest, taxes, depreciation and amortization (EBITDA) was 0.7 times (x) and operating EBITDA-to-gross interest expense was 33.6x. Funds from operations (FFO) fixed charge coverage was 13.2x and operating EBIT margin was 18.1%. The company's operating margin drives its ability to generate considerable free cash flow. PepsiCo has produced on average over $2.2 billion in free cash flow annually over the past five years.
PepsiCo's credit profile is stronger than similarly rated food and beverage companies, however, it's ratings are reflective of the credit metrics of the Pepsi system, which comprises PepsiCo and its significant, strategic bottlers, The Pepsi Bottling Group, Inc. (IDR: 'A+') and PepsiAmericas, Inc. (IDR: 'A'). The company's strong credit metrics are counter-balanced by the more highly levered credit metrics of PepsiCo's bottlers.
The Pepsi system's total debt-to-operating EBITDA on an aggregated basis was 1.0x, and the system's operating funds from operations (FFO) interest coverage on an aggregated basis was 15.0x for the year ended Dec. 31, 2007. For the prior year, the system's total debt-to-operating EBITDA was 1.0x, and the system's FFO interest coverage was 13.3x. The interest charge coverage increase was largely due to decreasing interest rates, impacting short-term and variable rate debt obligations.
With close to $40 billion in net revenues in 2007, PepsiCo is one of the largest global food and beverage companies. The company owns some of the world's most popular brands, including Pepsi-Cola, Mountain Dew, Diet Pepsi, Lay's, Doritos, Tropicana, Gatorade, and Quaker. 18 different PepsiCo brands had sales of $1 billion or more in 2007, and its products are sold in approximately 200 countries.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
Fitch Ratings
Wesley E. Moultrie II, CPA, +1-312-368-3186, Chicago
Christopher M. Collins, +1-312-368-3196, Chicago
Carla Norfleet Taylor, CFA, +1-312-368-3195, Chicago
Media Relations:
Brian Bertsch, +1-212-908-0549, New York
