Nov 16 - 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
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.