OREANDA-NEWS. March 16, 2015. Fitch Ratings has assigned a 'BBB+' rating to Coca-Cola Enterprises, Inc.'s (CCE's) proposed 15-year EURO500million notes. The Rating Outlook is Stable. The notes are issued by CCE and will rank equally with the company's senior unsecured obligations. CCE expects to use the net proceeds for general corporate purposes, which may include refinancing of commercial paper and the repayment of indebtedness.

KEY RATING DRIVERS

CCE's ratings reflect its stable cash flows, strong market position, and exclusive right to manufacture, sell and distribute Coca-Cola brand beverages in Western Europe. Coca-Cola products have leading market share that allows for premium pricing of the Coca-Cola brands within CCE's non-alcoholic ready-to-drink portfolio for each of its territories. For 2014, CCE generated approximately \\$8.3 billion of net sales with almost two thirds of revenue coming from its largest two markets, Great Britain and France.

The ratings incorporate CCE's high financial leverage and the firm's good free cash flow (FCF) generation. Leverage (total debt-to-operating EBITDA) at 2.8x was at the higher end of Fitch's expectation in 2014. Fitch currently expects leverage to approximate 3.2x in 2015 due to currency headwinds. As such, CCE has limited cushion within the rating given the higher leverage.

Operating Performance Challenged
CCE is managing through persistent headwinds with the macro environment in Western Europe which has been characterized by reduced consumer spending, higher unemployment and the negative effects of austerity programs. In addition, the competitive environment has been challenging particularly in Great Britain. As such, consumer behavior and purchasing decisions remain shaped by post-recession aftereffects with more consumers embracing smaller and more frequent shopping trips. Many consumers remain cash conscious, seeking good value for their spending patterns although brands remain important to consumers as non-alcoholic beverages do benefit from the growing premium trend.

During the fourth quarter 2014 net sales totaled \\$1.9 billion, an increase of 1.5% on a currency neutral basis. Volume increased 2% during the quarter due primarily to Coca-Cola trademark brands including 9% growth for Coca-Cola Zero and good introductory volume for Coca-Cola Life. For the full year, volume was flat and revenue totaled \\$8.3 billion, a decline of 0.5% on a currency neutral basis. Comparable and currency-neutral operating income for the fourth quarter increased by 5% to \\$227 million.

Current operating challenges and currency headwinds are expected to continue into 2015, thus constraining revenue, operating income and FCF growth. Fitch expects CCE will be willing to adjust discretionary spending accordingly to offset potential cash shortfalls such that CCE borrowing needs do not increase from current expectations. In addition, Fitch expects underlying operating income trends will remain stable to up slightly in 2015. Negative rating triggers include weakening core operating performance that adversely affects credit metrics.

Innovation & Digital Key Growth Drivers
With government focus on health and well-being, CCE will need to continue innovation efforts focused on products and smaller pack size to expand the portfolio and offer consumers a wider variety of beverage options. Recent lower and zero calorie new product launches that are gaining traction across CCE's regions include Finley, Coca-Cola Life and Smartwater. CCE must position the company ahead of trends to meet or exceed growth targets and continue exploring alternative distribution avenues to adjust to the changing lifestyles of savvy shoppers. For example, with traditional retailers struggling and hard discounters and premium retailers growing, CCE has adapted packaging alternatives and product offerings to address changing market needs. The use of digital marketing is also growing more important especially in the United Kingdom, which has one of the most mature online grocery markets in Europe.

Leverage at High-End of Credit Metrics
CCE's credit metrics are in line with Fitch's expectations, but as mentioned previously, are projected to remain at the high end, resulting in limited room in the rating. At the end of 2014, total debt-to-operating EBITDA was 2.8x and operating EBITDA-to-gross interest expense was approximately 12x. This translates to slightly less than the midpoint of CCE's 2.5x-3x net leverage target. Given current foreign exchange headwinds for 2015, Fitch expects total leverage could approximate 3.2x by year end as previously mentioned. Importantly, Fitch's expectations for underlying stable operating performance have not changed. Negative triggers include additional debt financing outside of current expectations due in part to weakened operating performance.

Longer-term in this lower growth environment, Fitch expects CCE will sustain and manage within the midpoint of its net debt leverage target. which equates to gross leverage of approximately 3x or less. Higher long-term leverage would be a concern as Fitch anticipates that acquisitions may occur given CCE's desire for franchise territory expansion. However, in the case of a large debt-financed acquisition, expectations are that CCE would use FCF to quickly reduce leverage back to its targeted range in a 12-to-18-month timeframe. In addition, Fitch expects CCE would limit share buybacks if leverage increased as a result of an acquisition and/or if any material deterioration in future operating performance occurred.

At end of year 2014, CCE had issued \\$146 million in commercial paper (CP). Material maturities in 2015 and 2016 include \\$475 million of 2.125% notes with a substantial portion that is swapped into Euro and \\$250 million of 2% notes. A material amount of CCE's debt obligations are euro-denominated at 59% of total long-term debt. Fitch expects the company will continue to narrow the currency mismatch and foreign exchange risk between the firm's debt balances and its cash flow by refinancing with euro-denominated debt when the opportunity arises.

Good Liquidity
CCE has good liquidity of nearly \\$1.2 billion at the end of 2014, inclusive of \\$223 million of cash and full availability under the firm's \\$1 billion multi-currency credit facility, expiring in September 2017. FCF (cash from operations less capital spending less dividend) for 2014 was \\$404 million. For 2015, Fitch expects FCF in a similar range. CCE has hedged a portion of its cash flow sources to reduce foreign exchange risk that could affect the cash distribution.

CCE has materially increased the dividend during the past five years from \\$0.48 to \\$1.12, with the latest increase of 12% per share for 2015. Fitch expects annual dividend payments in excess of \\$250 million for the year to translate to the high end of its dividend payout (dividend-to-earnings) range of 35% to 40%. CCE also has aggressively repurchased an average of almost \\$875 million shares annually during the last four years. CCE expects to repurchase approximately \\$600 million of its shares for 2015. With CCE at the high end of its leverage range, Fitch expects share repurchases will continue to moderate and become more dependent on FCF generation and growth in EBITDA.

KEY ASSUMPTIONS
--Underlying operating performance trends remain stable with modest operating income growth expected in 2015;
--Leverage will increase to approximately 3.2x in 2015, slightly outside of Fitch's sensitivities due to the negative effects from foreign exchange. Fitch expects in this lower growth/weak Euro environment for CCE to take steps in 2016 to manage within the midpoint of its net debt leverage target; ;
--FCF generation of approximately \\$400 million;
--Combined share repurchases and dividend of almost \\$900 million;
--Foreign exchange will have an approximate negative effect of \\$100 million on FCF in 2015.

RATING SENSITIVITIES

Fitch does not currently expect a positive rating action based on CCE's current financial policies. Future developments that could, individually or collectively, lead to a positive rating action include:

--Gross debt-to-operating EBITDA consistently below 2.3x or net leverage below management's targeted range of 2.5x-3x due to operating income growth and continued strong FCF generation that results in debt reduction;
--Significant additional geographic diversification concurrent with lower leverage and/or an equity stake and board representation by The Coca-Cola Company.

Future developments that may, individually or collectively, lead to a negative rating action include:
--Gross debt-to-operating EBITDA sustained above 3x in the event of weakening operating performance or change in financial policy by materially increasing debt-financed share repurchases;
--Persistent declines in volumes concurrent with material margin compression and significantly lower FCF and EBITDA that could be driven by competitive effects, changing consumer spending patterns, and persistent macroeconomic headwinds;
--
--Leverage remains outside its targeted range for longer than a 12-to-18-month period following a material debt-financed acquisition;
--CCE does not take adequate steps to mitigate the effects of foreign exchange risk by lowering discretionary spending to offset decreased excess cash;