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Rating Action:

Moody's downgrades Nestlé to Aa3; stable outlook

22 Oct 2019

Milan, October 22, 2019 -- Moody's Investors Service ("Moody's") has today downgraded to Aa3 from Aa2 the issuer rating of Nestlé S.A., the world's largest food and beverage group. Concurrently, the agency has downgraded to Aa3 from Aa2 the senior unsecured long-term ratings of its guaranteed subsidiaries and affirmed the Prime-1 (P-1) short-term ratings. The outlook is stable.

The rating action follows the announcement on 17 October that the company plans to undertake an additional CHF 20 billion share buyback to be completed over the next three years.

"The downgrade reflects the deterioration in Nestlé's credits metrics following the announced buyback programme, as a result of which, the company's ratios will no longer remain commensurate with the existing Aa2 rating. In addition, the buyback confirms that the company's tolerance for leverage is higher than in the past," says Lorenzo Re, a Moody's Vice President - Senior Analyst and lead analyst for Nestlé.

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

RATINGS RATIONALE

On 17 October, Nestlé announced the decision to return up to CHF20 billion (€18.2 billion) to shareholders over the next three years via a new share buyback program or extraordinary dividends. Moody's therefore expects that Nestlé's credit metrics will not be commensurate with the previous Aa2 rating for a prolonged period of time. In particular, Moody's expects that Nestlé's retained cash flow (RCF)/net debt will remain between 20% and 25% through 2021, which is below the minimum tolerance level of 30% for the previous Aa2 rating.

Nestlé's credit metrics have progressively deteriorated since 2017 because of the currently ongoing CHF20 billion share buyback programme to be completed by the end of 2019 and some acquisitions completed in the last 18 months. However, proceeds from assets disposals, including the CHF10.2 billion from the recent sale of the Skin Health business, could have partially reverted this trend, if Nestlé had chosen to use them to reduce debt.

Moody's expects that the new shareholder distribution will be largely financed with proceeds from disposals and operating cash flow generation, with limited need for additional debt. The rating agency forecasts Nestlé's funds from operations (FFO) to increase towards CHF16.7 billion in 2021 from CHF14.6 billion in 2018, supported by low single digit organic revenue growth and by further improvements in profitability, in line with the company's target to increase its underlying operating margin to 17.5%-18.5% in 2020 from 17% in 2018. While these targets could result challenging given the current slowdown in global economic growth, Nestlé maintains substantial flexibility to manage its financial profile over the medium term and could potentially reduce its share buyback programme in case of material deterioration in operating performance.

Nestlé's rating continues to be supported by the company's strong business profile, underpinned by (1) its position as the largest food and beverage group in the world by revenues; (2) high degree of diversification by segment, product and geography, with a growing presence in emerging markets; and (3) high-quality brand portfolio.

Nestlé's liquidity profile remains strong, despite continued use of its commercial paper (CP) programme, supported by its cash position (CHF5 billion as of June 2019 plus CHF10.2 billion cashed in from the sale of Nestlé Skin Health in October) and the availability under existing credit lines (approximately CHF12.1 billion equivalent). Nestlé also benefits from its 23.2% stake in L'Oréal (worth around €31 billion as of October 2019), which could also be, at least partially, monetised if needed. Existing sources of liquidity, together with an expectation of stable cash flow generation from operations (CHF15.9 billion in 2020) are sufficient to cover the group's capital expenditure (around CHF5.0-5.2 billion per annum, including leases), dividend payments (CHF7.7 billion in 2020, including dividends to non-controlling interest) and debt maturities (CHF19.2 billion as of June 2019, including CHF12.4 billion CP utilisation), as well as the ongoing share buyback.

In terms of environmental, social and governance (ESG) considerations, the most relevant factor for Nestlé's ratings are governance considerations related to its financial policies. Despite the recent shift towards higher shareholder remuneration via share buyback programmes, the group's financial policy remains conservative and commensurate with the current rating, with a low leverage target, a prudent M&A policy and dividend distributions that grow in line with earnings.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectations that Nestlé will maintain an elevated financial flexibility, owing to solid cash flow generation, allowing it to finance the planned shareholder distribution as well as some bolt-on acquisitions, maintaining a stable financial profile.

WHAT COULD CHANGE THE RATINGS UP/DOWN

An upgrade is unlikely in the near-term owing to the group's financial policy and tolerance for higher leverage. However, upward rating pressure could develop if the company returned to a more conservative financial policy leading to an improvement in credit metrics, with retained cash flow/net debt returning to above 30% on a sustained basis, combined with the maintenance of a strong business profile, operating performance and liquidity management.

Downward pressure could develop from a combination of (1) retained cash flow/net debt deteriorating to below 20% for a prolonged period of time; and (2) deterioration in operating profitability with Moody's adjusted EBITA margin falling below 15%; or (3) significant deterioration in Nestlé's current very strong market positions in its main businesses.

LIST OF AFFECTED RATINGS

..Issuer: Nestle S.A.

Downgrades:

....Long-term Issuer Rating, Downgraded to Aa3 from Aa2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Aa3 from Aa2

Outlook Actions:

....Outlook, Changed To Stable From Negative

..Issuer: Nestle Finance International Ltd.

Affirmations

....BACKED Commercial Paper, Affirmed P-1

....BACKED Other Short-term, Affirmed (P)P-1

Downgrades:

....BACKED Senior Unsecured MTN Program, Downgraded to (P)Aa3 from (P)Aa2

....BACKED Senior Unsecured Regular Bond/Debenture (Local/Foreign Currency), Downgraded to Aa3 from Aa2

Outlook Actions:

....Outlook, Changed To Stable From Negative

..Issuer: Nestle Holdings (U.K.) PLC

Affirmations:

....BACKED Commercial Paper, Affirmed P-1

Outlook Actions:

....Outlook, Changed To Stable From Negative

..Issuer: Nestle Holdings, Inc.

Affirmations:

....Other Short-term Program, Affirmed (P)P-1

....BACKED Other Short-term Program, Affirmed (P)P-1

Downgrades:

....BACKED Senior Unsecured MTN Program, Downgraded to (P)Aa3 from (P)Aa2

....Senior Unsecured MTN Program, Downgraded to (P)Aa3 from (P)Aa2

....BACKED Senior Unsecured Regular Bond/Debenture (Local/Foreign Currency), Downgraded to Aa3 from Aa2

Outlook Actions:

....Outlook, Changed To Stable From Negative

..Issuer: Nestle Australia Ltd.

Affirmations:

....BACKED Commercial Paper, Affirmed P-1

Outlook Actions:

....Outlook, Changed To Stable From Negative

..Issuer: Nestle Capital Corporation

Affirmations:

....BACKED Commercial Paper, Affirmed P-1

Outlook Actions:

....Outlook, Changed To Stable From Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Packaged Goods published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Nestlé S.A.is the world's largest food company, covering a wide range of food and beverage products, including powdered and liquid beverages, water, milk products and ice creams, nutrition and health science products, prepared dishes and cooking aids, confectioneries and pet care goods. The company's portfolio includes more than 2,000 brands, including some global brands such as Nestlé, Purina, Nescafé, Maggi, Nespresso and Nido. Although its largest market is the US, Nestlé is active in all the regions of the world. Nestlé generated approximately CHF91.4 billion (€83 billion) revenue and CHF18.4 billion (€16.7 billion) EBITDA (as adjusted by Moody's) in 2018.

REGULATORY DISCLOSURES

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.

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.

Lorenzo Re
Vice President - Senior Analyst
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

No Related Data.
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