UPDATE: S&P Downgrades McDonald's (MCD) to 'A-', Outlook to Stable

Standard & Poor's Ratings Services lowered all of its ratings, including the corporate credit rating, on McDonald's Corp. (NYSE: MCD) to 'A-' from 'A'. The outlook is stable. We also lowered the commercial paper rating to 'A-2' from 'A-1' in accordance with the corporate credit rating.

"The downgrade reflects our assessment of the higher leverage from pull-forward of share repurchases into 2015 and our assumption that debt to EBITDA to be around 2.4x in 2015 versus our previous assumption of low 2x," said credit analyst Robert Schulz. "We expect the company will receive significant cash from refranchising over the next few years and to benefit from related cost reductions, but we believe it will continue to prioritize allocating capital to shareholders as the new CEO executes on new strategies."

The stable outlook reflects our expectation that after pulling forward share repurchases into 2015, McDonald's will moderate share repurchases in 2016 while working to return revenue growth, customer traffic, and financial performance to levels necessary to support the rating in light of continued substantial allocation of capital to shareholders.

We believe the new CEO is focused on a wide range of initiatives. Still, the competitive environment is fierce even as the restaurant segment seems to be benefiting from lower gas prices. This weaker performance and added debt for share repurchases in 2015 will lead to adjusted leverage of around 2.4x.

We would likely lower the rating by one notch if the company increases its return of capital to shareholders in 2016 beyond current planned levels while experiencing limited improvement in customer response (improved traffic and positive comparable sales in the U.S. for example) during the next year to 18 months. Greater distributions to shareholders and lack of recovery from new strategies would lead to credit measures to worsen towards the high-2x range. One scenario leading to a lower rating would be continued negative comps in the U.S., lack of return to growth in the Chinese market and share repurchases over $3 billion in 2016. This performance would lead us to select the lower of the 'a-/bbb+' anchor score. A downgrade could also result from further shifts in the company's financial policy such that additional shareholder returns would result in debt leverage over 3x on a sustained basis, even if the business recovered.

Longer-term, we may consider a higher rating if the company's turnaround actions for operating performance gains traction with consumers and leads us to conclude that operating performance will return to levels consistent with historical levels—for example, a turnaround in negative comparable sales. Also, necessary would be a clear intent to improve credit metrics back to historical levels (leverage under 2x, for example). However, given the company's financial policies and recent operating trends, we also view such a scenario as less likely in 2015 to 2016.

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