Fitch Rates McDonald's EUR500MM Notes Issuance 'A'
Fitch Ratings has assigned an 'A' rating to McDonald's (NYSE: MCD) EUR500 million (approximately $637 million) 2.375% senior unsecured notes due Nov. 27, 2024. The Rating Outlook is Stable. On Sept. 30, 2012, McDonald's had $13.3 billion of total debt.
The notes were issued under McDonald's global medium-term note program base prospectus dated Oct. 2, 2012, are not bound by financial covenants, and rank pari passu with existing debt. Proceeds will be used for general corporate purposes.
McDonald's ratings reflect the company's substantial cash flow generation, considerable financial flexibility, and leading global market position. McDonald's cash flow from operations has grown at a 10% compound annual rate since 2003 to $7.2 billion in 2011. Over the same time period, annual free cash flow (FCF) and year-end cash balance have averaged $1.6 billion and $2 billion, respectively. Reinvesting in its business and returning cash to shareholders while maintaining leverage appropriate for its 'A' credit rating are the foundation of McDonald's financial strategy.
The ratings also consider McDonald's significant real estate ownership and well-established franchisee network, which together strengthen its credit profile. McDonald's owns about 45% of the land and 70% of the buildings within its system. At Sept. 30, 2012, franchisees and affiliates operated 81% of the firm's 34,010 systemwide units. The remaining 19% of the firm's units were company-operated. Sales-based royalties, fees and contractual rent payments from franchisees represented 32% of McDonald's $27 billion of total revenue in 2011.
For the latest 12 month (LTM) period ended Sept. 30, 2012, total debt-to-operating EBITDA and operating EBITDA-to-gross interest expense were 1.3 times (x) and 18.6x, respectively. Rent-adjusted leverage, defined as total debt plus eight times gross rent expense divided by earnings before interest, taxes, depreciation, amortization and gross rent expense (EBITDAR), was 2.3x. Rent adjusted interest coverage, defined as EBITDAR divided by gross interest expense plus gross rent expense, was 5.0x, and funds from operations (FFO) fixed-charge coverage was 4.3x. McDonald's generated $1.1 billion of FCF during the LTM period. Credit statistics are in line with Fitch's expectations and are projected to remain relatively stable in the near term, even after incorporating the debt issuance discussed above.
Liquidity and Maturities:
At Sept. 30, 2012, McDonald's had $3.7 billion of liquidity consisting of $2.2 billion of cash and an undrawn $1.5 billion committed revolving credit line expiring Nov. 8, 2016. Long-term debt maturities totaled approximately CHF250 million remaining in 2012, $1 billion in 2013, and $700 million in 2014.
During the nine-months ended Sept. 30, 2012, McDonald's revenue grew 2% to $20.6 billion, operating income was flat at $6.4 billion, and combined operating margin declined 70 basis points (bps) to 31.1%. Excluding the impact of currency, revenue and operating income grew 6% and 4%, respectively. McDonald's global company-operated restaurant margin declined 70 bps to 18.3% during the year-to-date period due mainly to higher commodity food and labor costs across each of its geographic segments.
For the nine-months ended Sept. 30, 2012, global same-store sales (SSS) increased 4.1% with comparable guest counts contributing 2.2%. By segment, SSS rose 4.4%, 3.4%, and 2.5%, respectively, in the U.S., Europe, and the Asia/Pacific, Middle East and Africa (APMEA) region. Comparable sales are benefiting from expanded beverage and breakfast offerings, reimaging of restaurants, and a focus on value and branded affordability.
Year-to-date through Oct. 31, 2012, global SSS are up 3.5% as during the month of October McDonald's reported its first month of negative SSS in nearly 10 years. Fitch believes the weak consumer environment, particularly in Europe, and heightened competition in the U.S. is contributing to the slowdown in McDonald's sales performance. In response to these challenges, McDonald's continues to strengthen its value messaging by placing greater emphasis on entry-price platforms, such as the Dollar Menu in the U.S., and increasing advertising across each of its geographic segments.
Fitch currently rates McDonald's debt as follows:
--Long-term Issuer Default Rating (IDR) 'A';
--Bank credit facility 'A';
--Senior unsecured debt 'A';
--Short-term IDR 'F1';
--Commercial paper 'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'McDonald's Corporation Update' (Oct. 3, 2012);
--'Fitch Affirms McDonald's IDRs at 'A1/F1'; Outlook Stable' (Sept. 7, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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Judi M. Rossetti, CFA, CPA, +1-312-368-2077
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