Fitch Rates McDonald's $500MM Note Issuance 'A'; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to McDonald's (NYSE: MCD) newly issued $500 million 2.625% 10.25-year senior unsecured notes due Jan. 15, 2022. The Rating Outlook is Stable. At June 30, 2011, McDonald's had $12.3 billion of total debt.
The notes were issued under McDonald's Medium Term Notes Program dated Sept. 28, 2009 and rank pari passu with McDonald's existing debt. There are no financial covenants. Proceeds will be used for general corporate purposes, which may include refinancing of debt. Aggregate maturities of long-term debt total approximately $1 billion in both 2012 and 2013 and are expected to be refinanced. Fitch views this issuance as opportunistic given the extremely low market interest rates.
McDonald's ratings reflect the company's substantial cash flow generation, considerable financial flexibility, and leading global market position. The ratings also consider the company's significant real estate ownership and well-established franchisee network, which provides a sizeable royalty stream along with contractual rental income on properties owned or leased by McDonald's. At June 30, 2011, franchisees and affiliates operated approximately 80% of the company's 32,943 restaurants systemwide.
Over the past five years, annual free cash flow (defined as cash flow from operations less capital expenditures and dividends) has averaged $1.6 billion. Year-end cash balances have exceeded $1.8 billion during the same period. McDonald's liquidity is further supplemented by a $1.25 billion committed revolving credit line. The undrawn facility expires March 16, 2012 but is expected to be renewed before that date.
McDonald's three global operating priorities are to optimize its menu, modernize the customer experience and broaden accessibility to its brand. Year-to-date through Aug. 31, 2011, same-store sales (SSS) are up 4.7% with every region of the world contributing. Comparable sales are up 3.9% in the United States, 5.3% in Europe, and 3.5% in the Asia/Pacific, Middle East and Africa (APMEA) region. The company is benefiting from expanded beverage and breakfast offerings, restaurant re-imaging and a focus on everyday affordability. Fitch expects McDonald's to continue to generate strong operating results despite prolonged high unemployment, an increasingly competitive environment in the United States, and austerity measures in Europe.
Reinvesting in its business and returning cash to shareholders while maintaining credit measures appropriate for its 'A/F1' rating is the foundation of McDonald's financial strategy. The company plans to spend $2.5 billion on capital expenditures in 2011, up from $2.1 billion in 2010. During the six months ended June 30, 2011, McDonald's returned a total of $3.4 billion to shareholders in the form of share repurchases and dividends. This is also an increase from the $2.6 billion returned during the same period last year. Fitch would expect McDonald's to pull back on share repurchases should the company experience a prolonged period of SSS declines or significant margin compression but this is not anticipated.
McDonald's extensive procurement infrastructure provides substantial buying power but higher commodity costs are affecting the entire food complex. For the six months ended June 30, 2011, McDonald's global company-operated restaurant margin declined 70 basis points but remains high at 18.4%. Combined operating margin, which includes profits from franchise operations, however, expanded to 30.8% from 30.5% last year.
McDonald's credit statistics are in line with Fitch's expectations and are projected to remain relatively stable in the near term, even after considering the current debt issuance. For the latest 12-month (LTM) period ended June 30, 2011, total debt-to-operating earnings before interest, taxes, depreciation and amortization (EBITDA) and operating EBITDA-to-gross interest expense were 1.4 times (x) and 18.7x, 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 5.2x, and funds from operations fixed-charge coverage was 4.3x.
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'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'2011 Outlook: Restaurants; Positive Operating and Credit Trends, but Modest Sales Growth and Food Inflation Anticipated for the Industry' (Nov. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology