McDonald's (MCD) Senior Unsecured Ratings Cut to 'A3' by Moody's

Moody's Investors Service today downgraded McDonald's (NYSE: MCD) (McDonald's) senior unsecured ratings to A3 from A2 and short term commercial paper rating to Prime-2 from Prime-1. The downgrade reflects Moody's view that McDonald's acceleration of its return to shareholders will require higher than expected debt levels and result in a material deterioration credit metrics that will be more representative of the revised ratings. Moody's also views the increase in debt levels to further support shareholder returns beyond previous expectations as an adoption of a more aggressive financial policy that could continue to favor shareholders. The ratings outlook is stable. This concludes Moody's review initiated May 4, 2015.

Ratings downgraded are;

Senior unsecured notes and debentures downgraded to A3 from A2

Senior unsecured bank credit facilities downgraded to A3 from A2

Senior Unsecured shelf rating downgraded to (P)A3 from (P)A2

Subordinated shelf rating downgraded to (P)Baa1 from (P)A3

Preferred stock shelf rating downgraded to (P)Baa2 from (P)Baa1

Senior unsecured Medium Term Note program downgraded to (P)A3 from (P)A2

Subordinated Medium Term Note program downgraded to (P)Baa1 from (P)A3

Short term commercial paper rating downgraded to Prime-2 from Prime-1

RATINGS RATIONALE

The downgrade is due in part to McDonald's plan to accelerate its 3-year shareholder return target by returning between $8 to $9 billion to shareholders in 2015 through a combination of dividends and share repurchases. McDonalds current shareholder return target was announced in May 2014 and expected to return between $18 to $20 billion to shareholders between 2014 and 2016 through a combination of dividends and share repurchases. As part of the plan to accelerate returns to shareholders, McDonalds also indicated the aggregate payout will be at the high end of the $18 to $20 billion range.

"Overall, Moody's views this accelerated share repurchase and guidance to the high end of the payout range as McDonald's adopting a more aggressive financial policy towards shareholders that will result in significantly higher debt levels and weaker credit metrics during a period of continuing operating weakness." stated Moody's Senior Credit Officer Bill Fahy. Moody's estimates that additional debt required to fund the acceleration of its shareholder initiative would result in leverage on a debt to EBITDA basis approaching 3.0 times and retained cash flow to total debt of well under 15%. "In addition, McDonald's ability to strengthen credit metrics from the elevated levels expected in 2015 could be challenging in the event the company's turnaround plans and business restructuring were delayed or fell short of expectations or shareholder returns increased.

Overall, the A3 senior unsecured ratings recognize the global strength of the McDonald's brand, its excellent geographic diversity, a steady pipeline of new product offerings, leading market position, strong cash flow and excellent liquidity, and a healthy franchise network. It also reflects the earnings stability created by the fact that the majority of McDonald's operating income is derived from recurring rental income and franchise fees from its extensive franchisee network. However, Moody's also considers management's shareholder focused financial policies with regards to dividends and share repurchases that have been supported by higher debt levels during a period of continued weak operating performance and have resulted in weaker than expected credit metrics. Moody's also considers the high level of promotional activity within the U.S. quick service restaurant segment and increased challenges in certain international markets that continue to negatively impact earnings.

The stable outlook reflects our view that despite weak same store sales performance McDonald's brand strength and solid base of franchisees around the world continue to produce strong earnings and stable cash flows. The stable outlook also reflects our expectation that the company will prudently manage its financial policies within the context of its current ratings.

Factors that could result in an upgrade include a sustained improvement in operating performance and positive same store sales that drives stronger earnings, debt protection metrics and liquidity. A higher rating would require McDonalds to achieve and sustain debt to EBITDA migrating towards 2.5 times or retained cash flow to total debt above 25%. A higher rating would also require the company managing its financial policies that prudently balances both the interests of shareholders and bondholders and maintains a credit profile consistent with a higher rating.

Factors that could result in a downgrade include a sustained weakening of same store sales or earnings, or a deterioration in credit metrics with leverage approaching 3.25 times, EBITA coverage of interest below 6.0 times, or retained cash flow to debt falling well below 15% on a sustained basis. A deterioration in liquidity for any reason could also pressure the ratings.

The principal methodology used in these ratings was Global Restaurant Methodology published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

You May Also Be Interested In

• Gilead Sciences (GILD) Misses Q1 EPS by 288c
• The Hartford (HIG) Misses Q1 EPS by 13c
• BTIG cautious on McDonald's (MCD) as traffic remains challenged