Fitch Rates McDonald's Proposed $500MM Notes Issuance 'A'
CHICAGO -- April 29, 2013
Fitch Ratings has assigned an 'A' rating to McDonald's (NYSE: MCD) proposed
$500 million issuance of 30-year senior unsecured notes. The Rating Outlook is
Stable. At Dec. 31, 2012, McDonald's had $13.6 billion of total debt.
The notes were issued under McDonald's U.S. medium term notes shelf
registration dated Sept. 28, 2012, are not bound by financial covenants, and
rank pari passu with existing debt. Proceeds will be used for general
corporate purposes, which may include refinancing of debt.
KEY RATING DRIVERS:
McDonald's ratings reflect the company's substantial cash flow generation,
considerable financial flexibility, and leading global market position.
McDonald's generated $7 billion of cash flow from operations and $1 billion of
free cash flow (FCF) in 2012. At March 31, 2013, the brand had 34,565
system-wide restaurants of which 41% were in the United States (U.S.), 28%
were in the Asia/Pacific, Middle East, and Africa (APMEA) region, 21% were in
Europe, and 10% were in Latin America and Canada.
Maintaining credit statistics appropriate for its 'A' credit rating remains a
key part of McDonald's financial strategy. Cash flow priorities include
reinvesting in the business and returning cash to shareholders. The firm
expects capital expenditures to approximate $3.2 billion in 2013, up from $3
billion in 2012. Over half of this capital is being used to open new units and
the remainder is being used for reimaging and other investments in existing
The ratings also consider McDonald's well-established franchisee network,
significant real estate ownership and stable royalty stream, which together
strengthen its credit profile. At March 31, 2013, franchisees and affiliates
operated 81% of the firm's system-wide units while the remaining 19% were
company-operated. By region, the U.S. was 89% franchised, Europe was 73%
franchised, APMEA was 71% franchised, and other countries as a group were 93%
franchised. McDonald's owns about 45% of the land and 70% of the buildings for
its system with revenue from franchised units consisting of a combination of
rent, sales-based royalties, and other fees.
McDonald's credit statistics are in line with Fitch's expectations and are
projected to remain relatively stable in the near term, even after the debt
issuance discussed above. For the year ended Dec. 31, 2012, total
debt-to-operating EBITDA and operating EBITDA-to-gross interest expense were
1.4 times (x) and 18.7x, respectively. Funds from operations (FFO)
fixed-charge coverage was 4.0x for 2012.
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 2.4x for 2012. Lastly, rent adjusted
interest coverage, defined as EBITDAR divided by gross interest expense plus
gross rent expense, was 5.1x.
Liquidity and Maturities:
At Dec. 31, 2012, McDonald's had $3.8 billion of liquidity consisting of $2.3
billion of cash and an undrawn $1.5 billion committed revolving credit line
expiring Nov. 8, 2016. Aggregate long-term debt maturities include $690
million in 2013, $659 million in 2014, and $1.2 billion in 2015.
First Quarter 2013 Operating Performance:
Consolidated revenue increased 1% to $6.6 billion during the first quarter
ended March 31, 2013 due mainly to royalties, rent, and fees from franchised
restaurants. Global same-store sales (SSS) declined 1%, against a difficult
7.3% year-over-year comparison. SSS declined 1.2% in the U.S., 1.1% in Europe,
and 3.3% in APMEA but were up 5.6% in other countries.
The fragile global consumer environment and heightened competition in the U.S.
is negatively affecting McDonald's SSS performance. Fitch believes McDonald's
focus on solidifying its value leadership, offering menu variety, and
improving the customer experience around the world will help mitigate sales
pressures. The launch of the Egg White Delight and Blueberry Pomegrante
Smoothies in the second quarter of this year is an example of how McDonald's
is offering menu variety in the U.S.
McDonald's consolidated operating income declined 1% to $1.9 billion during
the quarter but was flat excluding currency translation. Fitch expects
McDonald's operating cash flow to remain strong in 2013 but recognizes that
operating income could grow at a rate below the firm's average long-term
annual target of 6%-7% due mainly to the challenging sales environment.
McDonald's combined operating margin contracted 50 basis points (bps) to 29.5%
during the first quarter. Franchised restaurant margin declined 60 bps to
81.7% and company-operated restaurant margin fell 130 bps to 16.2%. SSS
declines impacted the firm's ability to offset cost pressures in labor,
occupancy, and other restaurant expenses during the quarter. McDonald's
expects food cost to increase 1.5%-2.5% in the U.S. and 2.5%-3.5% in Europe
McDonald's expects margins to remain pressured through 2013 but has stated
that the rate of compression will be less pronounced in the coming quarters as
SSS comparisons ease. Global SSS increased 3.7%, 1.9%, and 3.1% during the
second, third, and fourth calendar quarters of 2012.
Future developments that may, individually or collectively, lead to a positive
rating action include:
--Sustainably strong operating performance, as exhibited by positive SSS
growth and operating income growth, concurrent with a more conservative stance
towards share repurchases and dividends would be a credit positive.
--A material reduction in leverage due to items mentioned above and continued
generation of sizable FCF could result in an upgrade to McDonald's ratings.
Future developments that may, individually or collectively, lead to a negative
rating action include:
--A downgrade in the near-to-intermediate term is not anticipated as
McDonald's has modest room within its ratings.
--However, a prolonged period of SSS declines or margin contraction without a
corresponding pull back in share repurchases and dividend increases could
result in a negative rating action.
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'.
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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Carla Norfleet Taylor, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Judi M. Rossetti, CFA, CPA
Michael L. Weaver
Brian Bertsch, New York, +1 212-908-0549
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