Coca Cola (KO) Outlook Cut to Negative by S&P; Notes Recent Increased Debt, Mixed Earnings

Standard & Poor's Ratings Services today revised the outlook on The Coca-Cola Co. (NYSE: KO) to negative from stable and affirmed all of the ratings on the company, including the 'AA' corporate credit rating.

"The outlook revision reflects debt balances that have increased in recent quarters as earnings have been mixed and the company continues to invest in various strategic initiatives, including productivity and refranchising its bottling operations," said Standard & Poor's credit analyst Chris Johnson. "In addition, we believe several one-time items will pressure credit measures and earnings over the next 12 to 18 months, including what the company refers to as structural items related to the refranchising of its bottling operations, other restructuring costs, and foreign currency impact."

Coke benefits from its very strong position as the world's largest nonalcoholic beverage company, anchored by well-known brands, above-average EBITDA margin, as well as broad geographic diversification, including an extensive global bottling network. Strong brand awareness continues to contribute to Coca-Cola's roughly 40% leading share in the mature U.S. carbonated soft drink (CSD) market, its estimated worldwide CSD market share of more than 50%, and its estimated No. 1 share position in the U.S. nonalcoholic liquid refreshment beverage category (according to Beverage Digest).

The negative outlook reflects the likelihood that Standard & Poor's could lower the rating if the company does not strengthen its credit metrics over the next 12 to 24 months and restore credit metrics to historical levels. We expect the company to show some progress in reducing debt and improving cash flows in the latter half of 2016, and to sustain leverage below 2.0x and FFO to total debt above 45% in 2017 and thereafter. Still, we could lower the ratings if earnings do not improve and the company does not reduce share repurchases and strategic investments, or if the company does not strengthen performance, possibly due to a slowdown in global economic growth. This could result in debt balances remaining above $40 billion, debt to EBITDA staying above 2x, and FFO to debt of less than 45%.

We could revise the outlook to stable if the company makes headway in reducing its debt to EBITDA below 2x and restoring FFO to debt above 45%. We believe this could begin to occur in 2016 if EBITDA margins rebound as anticipated and the company sustains organic growth in the 3% to 5% area, materially reduces its share repurchases to below $1 billion annually, and applies discretionary cash flows (including cash flows after any possible future bottler refranchising proceeds) to debt repayment.

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