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Fitch rates Coca-Cola's EUR8.5 billion issuance A+

Staff writer |
Fitch Ratings has assigned an A+ rating to The Coca-Cola Company's multi-tranche issuance of Euro senior notes.

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This include EUR2 billion floating rate notes due 2017, EUR2 billion floating rate notes due 2019, EUR1.5 billion 0.75% senior notes due 2023, EUR1.5 billion 1.125% senior notes due 2027 and EUR1.5 billion 1.625% senior notes due 2035. The Rating Outlook is Negative.

Coca-Cola had approximately $41.7 billion of debt as of Dec. 31, 2014. A complete list of ratings follows at the end of this release.

The notes will be issued by Coca-Cola and will rank equally with the company's senior unsecured obligations. Coca-Cola will use the net proceeds from the offering to fund the repayment or redemption of the company's 5.350% notes due 2017, 4.875% notes due 2019 and 0.750% notes due March 13, 2015, including related fees, expenses and redemption premiums and to repay commercial paper.

Coca-Cola may also use a portion of the proceeds for general corporate purposes, which may include working capital, capital expenditures, acquisitions of or investments in businesses or assets, redemption and repayment of short-term or long-term borrowings and common stock purchases.

Given the prominence of carbonated soft drinks (CSDs) in Coca-Cola's beverage portfolio, the ratings consider the multiyear decline in CSD volumes in the U.S., continued concern over artificial sweeteners affecting diet CSD demand in North America, and modest CSD growth in other developed countries.

However, this risk is mitigated by Coca-Cola's market strength in developing geographies with greater long-term growth characteristics driven by low per capita consumption characteristics and expanding middle class that should provide an important longer-term offset.

Innovation and mergers and acquisitions (M&A) will continue to play pivotal roles for non-alcoholic beverage companies including Coca-Cola to evolve their product portfolios beyond CSDs and adapt to changing consumer behavior.

Diet CSD declines in the U.S. are in the mid- to high single-digit range as perceptions toward artificial sweeteners, fueled by social media attacks, remain highly negative. U.S. diet volume trends are also inherently more volatile given the relatively narrow drinker base.

As the shift in consumer attitude has become more centered on health and wellness, companies are targeting new beverages that are fresh, natural, minimally processed, and have a shorter ingredient list with flavorful taste profile.

Whether beverage innovation brings back lapsed consumers to the CSD category given the plethora of alternative choices is a key that Fitch believes could prove challenging and provides a greater urgency to have a well-rounded beverage portfolio.

Fitch does expect regular CSD retail trends to remain stable in North America though in 2015, buoyed by positive price/pack mix, marketing investments and an improving U.S. economy.

Fitch remains concerned with Coca-Cola's high gross leverage that has been elevated by substantial commercial paper (CP) balances. Coca-Cola's gross leverage is weak for the rating category at 3.2x on a total debt-to-operating EBITDA basis for 2014, up from 2.8x at the end of 2013.

Over the longer term as Coca-Cola progresses on North American refranchising, Fitch expects net proceeds will be used for debt reduction.

Coca-Cola's CP balance remains substantial at $19.1 billion as of December 31, 2014. With total debt at $41.7 billion, the CP mix was approximately 45% of the firm's overall capital structure which Fitch believes increases Coca-Cola's financial risk.

Coca-Cola has indicated that $20 billion is the upper limit for its CP program. A portion of the net proceeds will be used to repay CP.

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