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Rating Action:

MOODY'S ASSIGNS PRIME-1 RATING TO ATLANTIC INDUSTRIES NEW COMMERCIAL PAPER PROGRAM, GUARANTEED BY THE COCA-COLA COMPANY

15 Nov 2005
MOODY'S ASSIGNS PRIME-1 RATING TO ATLANTIC INDUSTRIES NEW COMMERCIAL PAPER PROGRAM, GUARANTEED BY THE COCA-COLA COMPANY

New York, November 15, 2005 -- Moody's assigned a Prime-1 rating to Atlantic Industries for its new commercial paper program. The Prime-1 rating is based on the guarantee of The Coca-Cola Company (rated Aa3/ Prime-1).

Atlantic Industries is a wholly-owned subsidiary of The Coca-Cola Company (KO). It is incorporated in Cayman with operations in Ireland and produces concentrate for much of Coca-Cola system's European and African operations.

The company will be borrowing in the US commercial paper markets to facilitate repatriation of funds for KO, which will use the proceeds to fund US marketing expenses, US employee salaries, US capital investment and build US cash reserves. The program will be managed by KO's Atlanta treasury staff and maturities will only be on days when the US is open for business. KO will not incur any new net debt as a result of this transaction and has extremely low leverage with cash balances equal to or exceeding total debt. While the repatriation of funds through foreign subsidiary borrowing will create significant structural subordination at the outset (approximately 50%of total debt at foreign subsidiaries), Moody's expects that Atlantic Industries debt will be fully repaid within 18 months and will not notch KO's ratings downward for this temporary situation.

KO's ratings reflect its leading position in the global carbonated soft drink (CSD) industry, including its ownership of one of the most valuable consumer brands in the world, a growing non-carbonated portfolio, an unrivaled distribution network, and improving profitability of the overall bottler system. After losing momentum in volume growth and loss of share in some segments of the North American Beverage market last year, the system has begun to show signs of improvement recently.

The ratings reflect the financial condition and leverage of KO and its largest bottlers, since the company relies on its bottlers to reach the consumer. With $21 billion in revenues, KO is the world's largest soft drink producer, with an estimated 50% global market share in CSD. KO's ratings are supported by its global diversity and distribution system.

Although KO is exposed to some volatility due to its presence in developing markets, we believe that KO's global reach is a net positive because of the natural hedge, and the above average growth potential of some markets. KO's powerful distribution system also creates a barrier to entry. The leverage of the aggregated system remains somewhat high for the current rating level, reflecting the high leverage of some of KO's largest bottlers, but metrics are improving on a system basis. KO's ratings also incorporate the highly competitive nature of the beverage industry, as well as the slow-growth nature of the CSD industry in the more mature markets. Efforts to increase its presence in the non-carbonated beverage market are helping to drive some growth, although 85% of KO's worldwide volume is derived from CSD. KO's cash flow is strong, although it returns a significant amount to shareholders via dividends and share repurchases. After a period of senior management turnover, the new management team has focused on reinvigorating system growth through increased marketing and innovation. The success of these initiatives remains to be seen. Challenges include marketing execution, management bench strength after several years of downsizing, and balancing price and volume, all of which are being addressed this year. Moody's will monitor the company's progress in correcting these issues, including any impact they might have on credit protection measures.

KO's outlook, along with that of its largest bottler, CCE, is negative, based on the significant leverage in the bottling system, particularly at CCE. The rating outlook could be stabilized if the new management team's efforts to reinvigorate the system are successful, system debt to EBITDA falls below 2 times and EBIT to interest exceeds 7 times. On the other hand, system debt to EBITDA above 2.5 times and/or EBIT to interest materially under 6 times could result in a downgrade, as could failure of recent initiatives to reinvigorate growth, or a move to a more aggressive shareholder return policy.

KO is expected to maintain ample liquidity to cover the commercial paper borrowings from its guaranteed subsidiary, with cash balances in excess of $5.5 and peak outstandings under the program not expected to exceed $2.5 billion. Total CP outstandings for KO and its guaranteed subsidiary will likely peak at approximately $3.5 to $4 billion, just after the repatriation. In addition, KO also maintains $1.15 billion in committed bank facilities (in the form of 364-day bilateral facilities with no term-out options). KO has substantial operating cash flows. Free cash flow after working capital needs, capital expenditures and dividends is more than likely to reach the $3.5 billion mark over the next four quarters versus share repurchases which are expected to only be in the $2 billion range. Moreover, the company has a relatively high degree of flexibility with regard to capital expenditures, and also has unencumbered assets including trademarks, real-estate and receivables from its fountain businesses which, while no formal arrangements are in place, could be harnessed with some lead time to provide additional liquidity. Additionally, given its global operations, seasonality of cash flow is considered minimal.

The Coca-Cola Company is based in Atlanta, Georgia.

New York
Angela Jameson
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Linda Montag
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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