4th Mar 2020 07:37
(Alliance News) - Moody's Investors Service on Tuesday downgraded the outlook for Reckitt Benckiser Group PLC's debt rating to negative from stable following the announcement of another GBP2 billion of investments to be conducted by the company.
At the same time, Moody's affirmed the consumer goods firm's A3 rating. Reckitt Benckiser Treasury Services PLC's P-2 Backed Commercial Paper ratings and its A3 Backed Senior Unsecured ratings were affirmed as well, along with the A3 Backed Senior Unsecured ratings of Mead Johnson Nutrition Co.
The ratings agency said its outlook downgrade followed "the announcement of additional investments of GBP2 billion, most of which will be funded by a productivity programme but also reduce operating margins and free cash flow generation over the next three years".
Although this investment will come from "internally generated cash flows" and most investments will not likely be recurring, Moody's still expects the investment "will reduce the free cash flows available to reduce debt, thus limiting [Reckitt's] ability to improve leverage over the next 12 to 18 months".
Moody's also cited "increased uncertainty over Reckitt's ability to reduce leverage in line with the requirements for the assigned rating" as a reason for the negative outlook.
"The negative outlook reflects the increased uncertainty regards the ability of the company to reduce leverage in line with Moody's expectations for the rating assigned given rising investment needs and expected lower profitability and free cash flow generation. The negative outlook also reflects greater macroeconomic uncertainty driven by the coronavirus outbreak and the prospect of lower global GDP growth," Moody's said.
The outlook could be stabilised if Reckitt's revenue growth improved, leverage was expected to sustainably improve to below 3.0 times, and if its free cash flow generation and operating margins returned to historic levels.
A downgrade might result from failing to reduce leverage below the 3.0 times mark, retained cash flow to net debt was stuck below 15%, or its its market position showed deterioration.
In affirming the A3 rating, Moody's said it: "Reflects the company's focus on premium segments of the hygiene, health and nutrition markets resulting in high operating margins, its good geographical diversification, although uneven across segments, and a generally stable and strong cash flow generation."
However, Moody's also said "the rating is weakly positioned" as a result of Reckitt having made "limited progress in reducing leverage" following its Mead Johnson Nutrition acquisition in the US in 2017 which had an enterprise value of USD17.9 billion.
Based on Reckitt's 2019 results, Moody's said adjusted leverage was approximately 3.2 times on December 31, excluding exceptional items, largely unchanged from the end of 2018. The expected leverage in the A3 rating is between 2.5 and 3.0 times, it noted.
By Anna Farley; [email protected]
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