Moody's lowers PepsiCo senior debt rating

by Eric Schroeder
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NEW YORK — Moody’s Investor Service on Feb. 24 lowered the senior debt ratings of PepsiCo, Inc. and its supported subsidiaries to Aa3 from Aa2. Moody’s maintained its short-term issuance rating of Prime-1 and a stable outlook for PepsiCo.

“The downgrade reflects the higher leverage resulting from the approximately $4 billion cash cost of the transaction and $900 million payment to Dr Pepper Snapple to preserve distribution rights, together with a more aggressive financial policy over the last few years as reflected by accelerated share repurchases in 2008 and tolerance of a higher level of leverage after debt funded acquisitions,” said Linda Montag, senior vice-president at Moody’s.

Meanwhile, Moody’s said it is keeping the ratings of Pepsi Bottling Group (P.B.G.) and PepsiAmericas on review for possible upgrade, pending a decision by PepsiCo about whether or not it will guarantee or assume its debt. Failure to provide support for the outstanding debt may result in a withdrawal of these unsupported ratings, absent sufficient financial information on these subsidiaries that would allow for a separate rating analysis, Moody’s said.

The ratings service also said the stable outlook reflects PepsiCo’s “strong brand franchises in snack foods and beverages, global reach, solid innovation pipelines, efficient operations, and extensive and multifaceted distribution network, as well as its good liquidity and continued solid financial performance, offset by higher leverage after the bottler acquisitions.

“While the company has been challenged to achieve volume growth, especially in carbonated soft drinks in mature markets, it has good growth prospects in international markets and continues a strong innovation program. The integration of the bottlers should allow for synergies, which are now estimated to be in the $400 million range by 2012. We do not expect significant integration risks given the close cooperation within the system historically.”

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