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Coca Cola (KO) Maintains Strong Credit Profile Amid Temp. Increase in Leverage - Moody's

November 10, 2015 2:13 PM EST

A material increase in The Coca-Cola Company's (NYSE: KO) (Coke, Aa3 stable) gross leverage is partly the result of temporary factors, with deleveraging efforts likely in the medium term, says Moody's Investors Service. The Coke system's debt/EBITDA rose to just over 3.0 times in 2014 from 2.7 times in 2013.

"The drivers of Coke's increase in leverage include foreign-currency translation, which masks the fact that earnings and profits have been rising on a currency neutral basis, and Coke's substantial unfunded pension liability, which will likely decrease when interest rates rise," said Linda Montag, a Moody's Senior Vice President.

Coke's preference to incur US dollar debt, rather than repatriate overseas cash, to fund expenditures is also a major driver of its rising gross leverage, according to the report, "The Coca-Cola Company: FAQ on Gross Leverage, Refranchising and its Regional Bottlers." However, slower growth in the US relative to some overseas markets will reduce the proportion of US earnings in the company's mix.

Furthermore, Coke's investments in diversifying away from carbonated soft drinks toward coffee, energy drink and juice companies have increased leverage temporarily, but incremental cash flows from these investments, along with the refranchising of North American bottling operations, will allow for some deleveraging over time.

"Looking at Coke on its own does not provide a clear picture of credit," added Montag. "Coke has significant investments in some of its bottlers and relies on them to get its product to consumers. Cash flows between Coke and its bottlers are also material." Because Moody's analyzes Coke together with its bottlers, leverage increases at the bottlers for M&A or shareholder returns are considered to increase Coke's risk.

The report shows the aggregated financials for the Coke system as well as the risk profiles of Coke and its major rated bottlers.



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