Moody's Assigns 'Ba3' Corp. Rating to Keurig Green Mountain (GMCR); Outlook Stable

Moody's Investors Service ("Moody's") has assigned a Ba3 Corporate Family Rating and B1-PD Probability of Default Rating to Keurig Green Mountain (Nasdaq: GMCR). Moody's also has assigned Ba3 ratings to $6.4 billion of senior secured debt instruments being offered today to fund the $13.9 billion leveraged buyout of the US coffee company. The rating outlook is stable.

On December 7, 2015, Keurig announced that it had agreed to be acquired by an investor group led by JAB Holding Company ("JAB", Baa1/negative) for $13.9 billion equity value. To fund the transaction and to support the company's liquidity needs, the investor group is contributing $8.5 billion of cash equity and is offering $5.9 billion of five- and seven-year secured term loans and a $500 million five-year secured revolving credit facility. At closing, all existing debt at Keurig, which totaled $350 million at the end of September 2015, will be retired. The transaction is expected to close in the first quarter of calendar 2016.

RATINGS RATIONALE

Keurig's Ba3 Corporate Family Rating reflects the company's expanding base of category-leading Keurig single-cup brewers, which in turn drive sales of single-serve portion packs that generate high profit margins and strong cash flows. The rating also reflects growing competitive pressures in the single-serve coffee portion pack business that has led to a gradual decline in the company's growth rate, market share and profit margins. However, the US single serve coffee category should continue to grow for several years, albeit at a slowing rate, allowing KGM to grow earnings and reduce financial leverage.

At closing, financial leverage will be high for the Ba3 rating, but should decline steadily. Moody's estimates that debt/EBITDA will approximate 5.5x at closing and decline at a rate of at least a half-turn a year through a combination of planned cost reductions and earnings growth. Moody's cautions that the pace of deleveraging will be subject to high execution risk, including the uncertainty regarding sales of its brewers this past holiday season and heightened competition in coffee pod sales.

Keurig Green Mountain

Ratings assigned:

Corporate Family Rating at Ba3;

Probability of Default Rating at B1-PD;

Senior secured bank credit facility at Ba3 (LGD3).

Ratings could be upgraded if KGM is able to sustain stable operating performance and positive free cash flow, as well as debt/EBITDA below 4.0x. Ratings could be downgraded if liquidity erodes significantly and/or KGM faces deteriorating operational performance such that debt/EBITDA is sustained above 5.0 times.

The principal methodology used in these ratings was Global Packaged Goods published in June 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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