OREANDA-NEWS. Fitch Ratings has assigned a 'BBB' rating to Mondelez International, Inc.'s (Mondelez) issuance of EUR700 million 1.625% senior unsecured notes due 2023. Proceeds will be used for general corporate purposes, including refinancing a $1.75 billion 4.125% note due on Feb. 9, 2016. The customary change of control provision at 101% of face value is in place. The Rating Outlook is Negative.

KEY RATING DRIVERS

The Negative Outlook reflects Fitch's expectations for pressure on free cash flow (FCF) in the near term from heavy restructuring-related cash payments, particularly in 2016, and low core growth as reflected in negative volumes and lower-than-category growth rates in biscuits and chocolate year to date. Biscuits and chocolate represent approximately 70% of Mondelez's post-coffee profile. The company reported that volume trends have recently begun to improve.

Near-Term Top-Line Weakness: Mondelez is experiencing a broad-based global macroeconomic slowdown in its categories exacerbated by the currency effects of a strong dollar. Organic revenue growth has been in the 2% - 4% range over the past three years. It rose to the top end in 2015 as the company took higher than expected levels of pricing of around 6% - 7% with negative volume in the 2% - 3% range as consumers reacted to sticker shock in weak emerging markets. FX had a large negative impact on the top line, as with all multinational companies, with -13% expected this year.

High Medium-Term Leverage

Fitch expects that Mondelez will likely operate with gross leverage (total debt-to-EBITDA) of around 3.4x to 3.5x through 2016 as it executes share repurchases, and incurs peak cash restructuring charges. Total reported LTM debt-to-EBITDA was 3x at the end of third quarter 2015 but that includes the operating income of the more profitable coffee operations over the past several quarters. The coffee operations were contributed to a new joint venture (Jacobs Douwe Egberts; JDE) on July 2, 2015.

High Cash Outlays/Negative FCF in 2016

In 2014 the company announced a $3.5 billion restructuring program to be executed from 2014 through 2018 with $2.5 billion in cash costs. The purpose is to reduce supply chain and overhead costs by $1.5 billion by the end of 2018. Fitch anticipates that Mondelez can achieve the bulk of its $1.5 billion in annualized cost savings targeted by 2018, which should offset the loss of $600 million to $700 million in coffee EBITDA over time; however, savings are likely to be skewed to the outer years.

The majority of program charges were expected to occur in 2015 and 2016 with completion by year-end 2018. In addition, as with most restructurings there are other implementation costs which are directly attributable to those programs but do not qualify for special accounting treatment which can be meaningful. Since inception the company has incurred $1 billion in charges including $710 million in restructuring charges and $290 million in implementation expenses.

Fitch had previously assumed around $1 billion in cash restructuring costs in 2015 and $800 million in 2016 which would result in modest negative FCF in 2015 and modestly positive FCF in 2016. Year to date, cash paid towards the 2014 - 2018 program is $156 million. Given the current trajectory it appears that the bulk of cash outlays related to the 2014 - 2018 program will occur in 2016. Mondelez generates a significant portion of FCF in the fourth quarter, and with muted spends thus far, FCF should be positive this year but moderately negative in 2016.

Scale and Diverse Geographies: Mondelez's ratings incorporate its scale as one of the largest global packaged food companies with approximately $30 billion pro forma 2015 net revenue after $3.8 billion estimated revenue contribution to JDE. The company is well-balanced geographically with 39% of 2014 net revenue in higher-growth-potential emerging markets and 61% in mature developed markets. Mondelez has substantial scale with No. 1 global market share in biscuits, chocolate and candy as well as No. 2 global share in gum.

KEY ASSUMPTIONS

--2015 organic top line grows about 3% up from Fitch's expectations of 1.5% earlier in the year. Higher than expected pricing has boosted organic growth to the 3% range YTD. Growth rates of 2% to 3% are expected thereafter.
--Capex at $1.7 billion for 2015 and 5% of revenue in the medium term.
--FCF positive in 2015 and moderately negative in 2016 with higher cash restructuring next year than originally anticipated.
--Total debt-to-EBITDA in the 3.4x to 3.5x range in 2016.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:

--EBITDA tracks below expectation due to a shortfall in expected operating margin improvement or further deceleration in organic top-line growth, aggressive financial policies or engaging in a large debt-financed acquisition, such that leverage is likely to be consistently above 3.5x.

Future developments that may, individually or collectively, lead to a positive rating action include:

--The Outlook is likely to be revised to Stable if Mondelez sustains organic growth, including flat-to-positive volumes in the low single-digit range; makes substantial progress toward its stated margin improvement which would take EBITDA to or above 2014 levels (with coffee) of $5.6 billion and EBITDA margin in the 19% to 20% range (relative to LTM EBITDA margin of 17.8%), with the company comfortably maintaining leverage in the 3.0x - 3.5x range by balancing shareholder and debtholder interests.
--Over the long term, leverage consistently in the mid- to high-2x range and FCF above $1 billion annually could support a positive rating action; however, this is not anticipated in the near- to intermediate-term.

LIQUIDITY

Mondelez's liquidity at Sept. 30, 2015, includes more than $2 billion in cash and equivalents and an undrawn $4.5 billion senior unsecured revolving credit facility expiring in October 2018. Mondelez had $1.3 billion in commercial paper outstanding at quarter end. Upcoming long-term debt maturities are significant with $1.8 billion due in 2016 and $1.5 billion due in 2017. Fitch believes the company is likely to refinance 2016 and 2017 maturities and that today's actions at very low EUR rates are within expectations.

Fitch currently rates Mondelez as follows:

--Long-term Issuer Default Rating (IDR) 'BBB';
--Senior unsecured debt 'BBB';
--Credit facility 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.

The Rating Outlook is Negative.