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Rating Action:

Moody's affirms Diageo's A3 ratings; stable outlook

15 Dec 2016

Milan, December 15, 2016 -- Moody's Investors Service, ("Moody's") has today affirmed the A3/Prime-2 senior unsecured long-term and short-term ratings of Diageo PLC and of its guaranteed subsidiaries (together "Diageo" or "the group"). The outlook on the ratings remains stable.

"Today's rating action reflects our expectation that Diageo's key credit metrics will improve over the next 12 months, on the back of rising profitability and strong free cash flow generation," says Paolo Leschiutta, a Moody's Vice President -- Senior Credit Officer and lead analyst for Diageo. "Diageo's strong business profile, above average profitability and conservative financial policy compensate for temporary weakness in its metrics."

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Moody's expects that Diageo's key credit metrics will strengthen over the next 12 months, driven by improvements in the company's operating performance, led by the US market, the group's strong free cash flow generation and use of excess cash to reduce debt. Moody's expects that Diageo's organic profit will grow in line with the 4.0%-5.0% range that the rating agency sees for the global beverages industry. Furthermore, assuming ongoing weakness in the British pound, the group's profit will also benefit from the positive effect from foreign currency, which will compensate for the increase in debt during the last financial year.

Diageo's key credit metrics have been below the guidance for the rating since June 2014. As at June 2016, Diageo's financial leverage stood at 3.3x and its retained cash flow (RCF) to net debt at 10.2% (all Moody's adjusted), which compare to a maximum guidance of 3.0x and a minimum of mid-teens in percentage terms respectively for the A3 rating category. The weakness in the company's credit metrics reflects a combination of a medium-sized acquisition during financial year ended June 2015 and more recently (1) the negative impact on its reported financial debt following the devaluation of the British pound after the Brexit vote at the end of June 2016 and (2) a significant increase in the company's notional net IAS 19 pension liabilities due to the low interest rate environment. During fiscal year 2015-16 ending June 2016, foreign currency translation inflated Diageo's debt by approximately GBP725 million while pension liabilities more than doubled during the year from GBP400 million to GBP957 million (Moody's adjusted figures). These compare to GBP11.5 billion of adjusted debt at June 2016.

Temporary weakness in credit metrics is, however, offset by Diageo's strong business risk profile as the largest spirits maker globally. Its rating and stable outlook are supported by (1) the company's strong and diversified portfolio of spirits and beer brands; (2) its solid competitive positions in key spirits markets and very well diversified revenues based by geographic area; (3) its well-established distribution network; and (4) high profitability and strong, stable cash flows generation. Diageo produces and distributes around 25% of global premium spirits in volume terms, ahead of Pernod Ricard S.A.'s (Baa2 stable) approximate 16% share and Bacardi Limited (Baa1 stable, 9%), Beam Suntory Inc. (Baa2 stable, 7%) and Brown-Forman Corporation (A1 stable, 6%).

These positive elements are somewhat offset by (1) the company's exposure to a number of emerging markets with challenging macroeconomic conditions; (2) a degree of event risk associated with Diageo's track record of pursuing medium to large acquisitions, albeit within a prudent financial policy; as well (3) credit metrics that at FYE June 2016 remain below the guidance for the rating. Although Diageo might continue to pursue small acquisitions, Moody's notes that the current financial ratios do not offer much headroom in the rating category.

RATIONALE FOR STABLE OUTLOOK

The stable rating outlook reflects the size and stability of Diageo's operating cash flows and Moody's expectation that the company will retain its leading position in its core markets, as well as pursuing a conservative financial policy that will enable it to gradually improve its key credit metrics. The stable outlook does not factor in any material acquisitions.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating could result from (1) retained cash flow (RCF) /net debt above 18%; (2) financial leverage (i.e., debt/ EBITDA) below 2.7x; and (3) EBIT/interest over 5.5x all on a sustainable basis.

Conversely, downward pressure on the rating could result from a deterioration in the company's profitability and cash flow generation or large acquisitions/shareholder returns resulting in debt/EBITDA sustained materially above 3x and a retained cash flow (RCF)/net debt significantly below the mid-teens in percentage terms for a prolonged period of time.

List of affected ratings:

Affirmations:

..Issuer: Diageo PLC

.... Issuer Rating, Affirmed A3

....Senior Unsecured Shelf, Affirmed (P)A3

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

..Issuer: Diageo Capital BV

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Diageo Capital plc

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A3

....Senior Unsecured Regular Bond/Debenture, Affirmed A3

....Backed Senior Unsecured Shelf, Affirmed (P)A3

..Issuer: Diageo Finance B.V.

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

....Backed Senior Unsecured Shelf, Affirmed (P)A3

..Issuer: Diageo Finance plc

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A3

..Issuer: Diageo Investment Corporation

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A3

....Backed Senior Unsecured Shelf, Affirmed (P)A3

..Issuer: Grand Metropolitan Investment Corporation

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A3

Outlook Actions:

..Issuer: Diageo PLC

....Outlook, Remains Stable

..Issuer: Diageo Capital BV

....Outlook, Remains Stable

..Issuer: Diageo Capital plc

....Outlook, Remains Stable

..Issuer: Diageo Finance B.V.

....Outlook, Remains Stable

..Issuer: Diageo Finance plc

....Outlook, Remains Stable

..Issuer: Diageo Investment Corporation

....Outlook, Remains Stable

..Issuer: Grand Metropolitan Investment Corporation

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Alcoholic Beverage Industry published in October 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in London, UK, Diageo is a global leader in alcoholic beverages, with total net sales of GBP10.5 billion (approximately $13.5 billion) during FYE June 2016. Diageo sells its products in more than 180 countries and the company's largest earnings contributors were scotch, beer and vodka, which accounted for 24%, 18% and 13% of its net revenue during FYE June 2016, respectively. Diageo portfolio includes a range of brands, including 6 defined as global giants by the company: Johnnie Walker (the largest scotch whisky brand in the world by volume and the second largest spirit brand overall); Smirnoff (the largest vodka in the world the largest spirit brand overall); Captain Morgan (the second largest rum in the world); Baileys (the largest liqueur in the world); Tanqueray (gin); and Guinness (beer). During FYE June 2016 these strategic brands accounted for 40% of the company's net revenue. Diageo is also present in the high-end wine segment through its 34% stake in Moët Hennessy.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Paolo Leschiutta
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Marina Albo
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

No Related Data.
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