Pepsi (PEP) Senior Unsecured Debt Rating Raised to 'A' by S&P

Standard & Poor's Ratings Services today raised its issue-level ratings on PepsiCo Inc.'s (NYSE: PEP) senior unsecured debt to 'A' from 'A-', and affirmed the senior unsecured issue-level ratings at its bottling subsidiaries (The Pepsi Bottling Group Inc. and its subsidiaries and PepsiAmericas Inc.). The upgrade reflects our assessment of the group's asset coverage ratio of priority obligations to adjusted assets, which we believe has improved, factoring in additional information regarding brand values not reflected in the group's reported balance sheet.

The majority of PepsiCo's senior unsecured debt is issued by the group holding company, PepsiCo Inc., but the group still maintains significant priority obligations at its operating entities. These entities generate virtually all of the group's cash flow and represent a significant portion of adjusted assets, and do not guarantee the holding company's senior unsecured debt. We estimate the ratio of priority obligations to adjusted assets to be roughly 36%. However, we believe the group's established brand portfolio, including Pepsi, Lays, Ruffles, Doritos, Gatorade, Tropicana, Quaker, Lipton, and Walkers, have value that the company's book valuation currently does not reflect, which improves the ratio to below 30%. This, in addition to the geographic, product, and brand diversity at the company's various operating subsidiaries, as well as a continued wind-down of maturing priority debt issued at the company's North American bottling subsidiaries, adequately mitigates the effects of structural subordination of holding company lenders. We therefore equalize holding company unsecured debt with the group corporate credit rating.

The 'A' corporate credit and 'A-1' short-term and commercial paper program ratings on PepsiCo remains unchanged. PepsiCo's business strength benefits from its balanced portfolio of businesses, with strong positions and well-known brands in the relatively stable, cash-generating non-alcoholic beverage and snack food industries. PepsiCo's geographic diversification and improving EBITDA margin (excluding foreign currency impact) underpin the company's solid cash flow generation, which should permit it to maintain adjusted debt to EBITDA close to 2x and funds from operations (FFO) to debt near 35%. (We adjust PepsiCo's debt balances for underfunded pension obligations and operating leases, and calculate debt net of about 65% of the company's reported cash and short term investment balances in part reflecting the tax cost of repatriating overseas cash.

RATINGS LIST

PepsiCo Inc. 

 Corporate credit rating           A/Stable/A-1



Ratings Raised

                                   To         From

PepsiCo Inc.

 Senior unsecured                  A          A-



Quaker Oats Co.

 Senior unsecured                  A          A-

 



Ratings Affirmed

The Pepsi Bottling Group Inc.

PepsiAmericas Inc.

Bottling Group LLC

 Senior unsecured                  A

 

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