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Rating Action:

Moody's upgrades PepsiCo's ratings to Aa2 and assigns Aa2 to new Senior Notes due 2012

16 May 2007
Moody's upgrades PepsiCo's ratings to Aa2 and assigns Aa2 to new Senior Notes due 2012

New York, May 16, 2007 -- Moody's upgraded the senior long-term ratings of PepsiCo, Inc. and its guaranteed subsidiaries to Aa2 from Aa3 and affirmed the ratings of the company and its guaranteed subsidiaries for short-term issuance at Prime-1. The rating outlook is stable. The rating for the preferred stock of Hillbrook Insurance Company was also raised one notch to A3.

The upgrade reflects the company's very strong debt protection measures both on a standalone basis and for the PepsiCo system overall, even considering the recently announced dividend increase and increased share buyback program and also allowing for greater debt-funded acquisition activity. PepsiCo has had very strong financial performance in the years since the Quaker acquisition, which was a pooling and did not result in increased leverage. The upgrade reflects our expectation that, while share buybacks will increase to absorb expected pre-acquisition free cash flow, they would be modified in the event of either a very large acquisition or unexpected operating weakness. Moody's considers the strength of the Pepsi system on a combined basis which involves aggregating the two largest anchor bottlers, Pepsi Bottling Group and PepsiAmericas, together with PepsiCo to determine the overall financial risk of the system. While some debt protection measures look weaker on a system basis than the PepsiCo standalone ratios, the combined metrics are nevertheless consistent with the Aa2 rating. For 2007 we expect debt to EBITDA on a Moody's adjusted basis to be around 1.2 for the system and Retained Cash Flow to Net Debt is expected to be in the upper 50% range.

PepsiCo's Aa2 rating and stable outlook reflect its successful transformation since the mid-nineties with the spin-off of the bottling assets and certain other businesses, and the acquisitions of a number of food and beverage businesses. Its ratings are supported by its strong brand franchises in snack foods and beverages, as well as the positive impact that the reconfigured bottlers continue to have on its system. The ratings also incorporate PepsiCo's innovation capabilities and the strength of its distribution network.

PepsiCo has sustained consistent sales and cash flow growth as well as margin improvement over the past few years. As the global snack food market leader, PepsiCo's Frito-Lay provides it with strong and relatively stable earnings, and good diversification. International expansion continues to be a key part of its strategy; therefore, PepsiCo will likely continue with its investment overseas, which could fuel growth but might also consume capital resources. Frito-Lay North America (FLNA) is the largest profit driver for the company. Together, the company's food businesses accounted for about two-thirds of PepsiCo's division net sales and operating profit. The US carbonated beverage business has a solid number two market position, and innovation and strong distribution have given it leadership positions in a number of non-carbonated beverages and in certain channels, although trademark Pepsi and Mountain Dew have seen some softness in recent quarters. Fast-growing non-carbonated beverages are driving growth in its beverage business, making the company number one in liquid refreshment beverages overall. A growing consumer awareness of health issues could challenge the company longer term, as it could many food companies. Recently PepsiCo has increased its focus on health and wellness with a growing array of "good for you" and "better for you" products.

PepsiCo enjoys a solid liquidity profile due to its relatively stable cash flows, significant cash balances around the world and $1.5 billion five year bank facility.

The rating outlook is stable. Moody's believes that PepsiCo's business diversity, strong brand portfolio, new product innovation and marketing, careful attention to finding greater efficiencies and conservative financial management should allow for steady and consistent earnings and cash flow growth and ongoing improvements in debt protection measures.

The following ratings were upgraded:

PepsiCo senior unsecured debt to Aa2 from Aa3

PepsiCo bank loan rating to Aa2 from Aa3

Bottling Group, LLC notes guaranteed by PepsiCo to Aa2 from Aa3

Quaker senior unsecured debt guaranteed by PepsiCo to Aa2 from Aa3

PepsiCo shelf rating for senior to (P)Aa2 from (P)Aa3

PepsiCo shelf rating for subordinated to (P)Aa3 from (P)A1

Hillbrook Insurance preferred stock to A3 from Baa1

The following ratings were affirmed:

PepsiCo rating of the company for short-term debt at Prime-1

Concentrate Manufacturing Company of Ireland guaranteed short-term rating at Prime-1

The following rating was assigned:

PepsiCo Senior unsecured note due 2012 at Aa2

PepsiCo is a leading food and beverage company based in Purchase, New York

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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