Fitch Rates McDonald's Proposed $1.5B Notes Issuance 'A'; Outlook Stable
CHICAGO -- June 4, 2014
Fitch Ratings has assigned an 'A' rating to McDonald's (NYSE: MCD) approximate
$1.5 billion of proposed multi-tranche multi-currency notes. The issuance
includes $500 million 10-year USD notes, EUR400 million 15-year notes (about
$545 million) due 2029, and GBP300 million 40-year notes (approximately $503
million) due 2054. At March 31, 2014, McDonald's had $13.9 billion of total
The notes, which rank pari passu with existing debt, are being issued under
McDonald's U.S. medium-term notes shelf registration dated Sept. 28, 2012 and
global medium-term notes program dated Nov. 20, 2013. Terms do not include
financial covenants. Proceeds will be used for general corporate purposes.
KEY RATING DRIVERS:
Three-Year Total Cash Shareholder Return Target: McDonald's plans to return
$18 billion-$20 billion of cash to shareholders between 2014 and 2016 through
dividends and share repurchases. The vast majority will be funded with
internally generated cash flow, proceeds from refranchising, and other sources
of liquidity, but some incremental debt is anticipated. Credit metrics are
expected to remain acceptable for current ratings but a slight increase in
leverage would eliminate room to accommodate additional weakening of
same-store sales (SSS), operating income, or margins.
Substantial Cash Flow: McDonald's cash flow from operations (CFO) has grown at
an 8% compound annual growth rate since 2003 to $7.1 billion in 2013. CFO
growth slowed recently due to more modest sales and operating income growth
but remains substantial. Free cash flow (FCF - defined as cash flow from
operations less capital expenditures and dividends) has averaged $1.5 billion
since 2003. Fitch believes McDonald's efforts to reignite SSS growth could
result in a re-acceleration of operating earnings and cash flow growth.
Consistent Financial Strategy: McDonald's financial strategy is to reinvest in
its business, return cash to shareholders, and maintain credit statistics
appropriate for an 'A' credit rating. Capital expenditures are projected to
approximate $2.9 billion to $3 billion in 2014 while cash returned to
shareholders will consider the firm's recently announced three-year total cash
return target. During the first quarter of 2014, McDonald's paid total
dividends of $0.81 per share or $801.7 million and repurchased 4.5 million
shares for $432.4 million.
Strong Global Market Position: McDonald's is the world's largest restaurant
company, based on nearly $90 billion of system-wide sales, and a widely
respected brand. During 2013, McDonald's generated $28.2 billion of total
revenue and $8.8 billion of operating income. The firm's geographic segments
and their percentage of 2013 revenue and operating income were: the U.S. (32%
and 43%), Europe (40% and 38%), APMEA (Asia/Pacific, Middle East, and Africa)
(23% and 17%), and Other Countries and Corporate (5% and 2%). At March 31,
2014, the system consisted of 35,493 units.
Significant Franchise Revenue: At Dec. 31, 2013, franchisees and affiliates
operated 81% of McDonald's units while the remaining 19% were
company-operated. Revenue from franchising totaled $9.2 billion or 33% of
McDonald's total revenue in 2013. Revenue from franchising includes
sales-based royalties and contractual rent payments. McDonald's owns about 45%
of the land and 70% of the buildings for its system of restaurants. Net
property and equipment had a book value of $25.7 billion at Dec. 31, 2013.
Fitch views McDonald's recently announced plan to refranchise at least 1,500
units with an emphasis on APMEA and Europe favorably but expects the firm to
continue to operate a material percentage of its units.
Comprehensive Operating Strategy: McDonald's three global priorities include
optimizing its menu, modernizing the customer experience, and broadening
accessibility to its brand. Annual global SSS have only declined twice since
1997, despite multiple economic recessions. McDonald's long-term average
annual constant currency system-wide sales and operating income growth targets
are 3%-5% and 6%-7%, respectively. Fitch views McDonald's financial targets as
achievable but operating income growth could continue to be below target
levels over the near term as costs continue to rise and efforts to regain SSS
momentum take time to resonate with consumers.
Credit Statistics: For the latest 12-month period ended March 31, 2014, total
debt-to-operating EBITDA and rent-adjusted leverage (total debt plus 8x gross
rent expense divided by EBITDA plus gross rents) were 1.4x and 2.4x,
respectively. Rent-adjusted interest coverage (EBITDAR divided by gross
interest expense plus gross rent) was 4.6x and funds from operations (FFO)
fixed-charge coverage was 3.9x. McDonald's FCF margin to sales was 5.1%.
Significant Liquidity, Manageable Maturities: McDonald's liquidity at March
31, 2014, totaled $4.2 billion and consisted of $2.7 billion of cash and full
availability under the firm's undrawn $1.5 billion committed revolver, which
expires Nov. 1, 2016. Aggregate maturities of long-term debt as of March 31,
2014 were zero in 2014, approximately $1.2 billion in 2015 and roughly $900
million in 2016. About 60% of the firm's $13.9 billion of debt at March 31,
2014 was USD denominated and roughly 40% was foreign denominated.
Future developments that may, individually or collectively, lead to a positive
rating action include:
--An upgrade is not anticipated in the intermediate term given McDonald's
recent SSS trends, margin contraction, and plan to partially finance share
buybacks with incremental debt.
Future developments that may, individually or collectively, lead to a negative
rating action include:
--Total debt-to-operating EBITDA and rent-adjusted leverage sustained over
approximately 1.5x and 2.5x, respectively, and materially lower FCF;
--Two years of flat to negative global SSS and continued margin contraction;
--Weak or declining operating cash flow concurrent with meaningful incremental
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' (May 2014);
--'Fitch Affirms McDonald's IDRs at 'A1/F1' on Shareholder Return Plan;
Outlook Stable' (May 2014);
--'2014 Outlook: U.S. Restaurants - Shareholder Demands to Rise, Even as
Market Share Battle and Cost Pressures Continue' (December 2013).
Applicable Criteria and Related Research:
2014 Outlook: U.S. Restaurants (Shareholder Demands to Rise, Even as Market
Share Battle and Cost Pressures Continue)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
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Carla Norfleet Taylor, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Judi M. Rossetti, CFA, CPA
Wesley E. Moultrie II, CPA
Brian Bertsch, +1-212-908-0549 (New York)
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