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Announcement:

Moody's changes PepsiCo rating outlook to negative, Aa3 /P-1 ratings affirmed

Global Credit Research - 09 Feb 2012

Approximately $30 billion in rated debt and facilities affected

New York, February 09, 2012 -- Moody's Investors Service today changed the rating outlook of PepsiCo, Inc. and its rated subsidiaries to negative from stable. The senior unsecured long-term rating of Aa3 for the company and its guaranteed subsidiaries was affirmed, as was its Prime-1 short term rating. The outlook change followed the company's 2011 earnings announcement, during which managment lowered its earnings guidance for 2012.

"The negative outlook reflects our concern about the possible negative impact on PepsiCo's credit metrics of continued headwinds in 2012, including further increases in commodity costs which may not be fully covered through higher pricing, increased market place investment and higher pension and financing costs," said Linda Montag, Moody's Senior Vice President. In the face of these challenges, PepsiCo plans to increase its dividend payout and share repurchase activity, despite a recent upward creep in gross debt to EBITDA (as per Moody's calculations) which could further pressure the leverage metric. Moody's believes that the newly announced, $910 million restructuring plan, will be successful in achieving the promised incremental productivity savings of $1.5 billion over the next 3 years, but notes that the largest cash costs of implementing the plan will be incurred in 2012. The success of planned increases in advertising and marketing spend in reinvigorating some of the softer performing Pepsi businesses remains to be seen. Moody's said that PepsiCo's cash flow remains solid, but that most of its financial metrics are already more representative of the single A category, so any deterioration in credit metrics, or failure to regain business momentum, could pressure the Aa3 rating.

RATINGS RATIONALE

PepsiCo's rating reflect its strong brand franchises in snack foods and beverages, global reach, solid innovation pipelines, efficient operations, and extensive and multifaceted distribution network, as well as its good liquidity and historically stable financial performance. These factors are offset by continued cost headwinds, and by leverage that, while moderate, is expected to be materially higher than what Moody's would expect for a Aa3 rated credit. While the company has been challenged to achieve volume growth, especially in carbonated soft drinks in mature markets, is has good growth prospects in international markets and continues a strong innovation program.

The rating could be lowered should the company experience a prolonged decline in the strength of its operating profile. A downgrade could also occur if the company engages in large debt-financed acquisitions, or shifts toward a more aggressive financial policy. EBITA margin below 15%, retained cash flow to debt below 25% or debt to EBITDA approaching 3 times could lead to a downgrade (per Moody's calculations).

To stabilize the rating PepsiCo would need to show renewed momentum across all operating divisions, demonstrate the success of its cost savings initiatives by improving profitability, and maintain leverage at or below current levels.

Although currently unlikely, an upgrade would require the company to improve its operations, expand geographically and further strengthen its competitive position as well as articulate clear financial targets. Quantitatively an upgrade would require EBIT to interest of over 9 times and a commitment to sustain debt to EBITDA at or below 2 times.

PEP's liquidity profile is solid. It is characterized by relatively consistent operating cash flows, high cash balances, significant high quality short-term investments, committed bank facilities totaling $5.85 billion to support the issuance of short-term debt, including commercial paper, and modest long-term debt maturities.

The principal methodology used in rating PepsiCo, Inc. was the Global Soft Beverage Industry Methodology published in December 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Based, in Purchase, New York, PepsiCo, Inc. ("PEP") is a world leader in snack foods and beverages with 2011 revenues of $66.5 billion.

Moody's current ratings on PepsiCo, Inc. and its affiliates which are affirmed are:

PepsiCo, Inc.:

Senior Unsecured NA Aa3

Senior Unsecured domestic currency Aa3

Senior Unsecured foreign currency Aa3

Senior Unsecured MTN domestic currency (P)Aa3

Senior Unsecured Bank Credit Facility domestic currency Aa3

Senior Unsec. Shelf domestic currency (P)Aa3

Commercial Paper NA P-1

Commercial Paper domestic currency P-1

BACKED LT IRB/PC domestic currency Aa3

PepsiAmericas, Inc.:

Senior Unsecured domestic currency Aa3

Quaker Oats Company:

Senior Unsecured domestic currency Aa3

Hillbrook Insurance Company, Inc.:

Pref. Stock domestic currency Baa1

Pepsi Bottling Group, Inc.:

BACKED Senior Unsecured domestic currency Aa3

Bottling Group, LLC:

Senior Unsecured domestic currency Aa3

BACKED Senior Unsecured domestic currency Aa3

Concentrate Manufacturing Company of Ireland:

BACKED Commercial Paper foreign currency P-1

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Linda Montag
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes PepsiCo rating outlook to negative, Aa3 /P-1 ratings affirmed
No Related Data.

 

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