Fitch: No Rating Implication from Kimberly-Clark Pension Settlement
As outlined below, the settlement is a modest credit positive. The additional pro-forma leverage of 1.8 at Dec. 31, 2014 is also modest and within Fitch's expectation (see Fitch Affirms Kimberly Clark's IDR at 'A'; Outlook Stable Feb. 11, 2014).
At the end of 2014, KMB's benefit obligation was almost \$7 billion and plan assets were approximately \$6 billion. The settlement announced today should significantly reduce the overall size of the company's pension obligation. More importantly, KMB's pension shortfall on a GAAP basis narrows materially to less than \$600 million from \$1.9 billion at the end of 2008. The company has come a long way towards narrowing the 2008 obligation but even after contributing more than \$1.7 billion from 2009-2011, there was nearly a \$1 billion obligation on a GAAP basis at the end of 2014. Fitch anticipates that the modest credit positive aspect of the settlement derives from the fact that the size of future cash contributions to the remaining pension plan is likely to be muted if there is significant market dislocation in the future.
Future developments that may, individually or collectively, lead to an upgrade include:
The company has the flexibility to manage its credit metrics at stronger levels given stable cash flows. Committing to operating with leverage below 1.5x would support upward migration. However, the company appears comfortable with its current ratings and thus an upgrade does not appear likely.
Future developments that may potentially lead to a negative rating action include:
A change in financial strategy to operate with leverage above 2x, most likely through a large debt financed share repurchase program or a transformative acquisition, would be a negative driver. Such an event would be assessed upon its occurrence. Further, any impairment in the company's ability to consistently generate operating cash flow in the \$2.5 billion to \$3 billion range would be of concern. These situations arise due to meaningful market share losses or prolonged and significant increases in major commodities concurrent with an inability to fully pass on price increases.
Fitch currently rates KMB as follows:
--Long-Term Issuer Default Rating (IDR) at 'A';
--Short-Term IDR at 'F1';
--\$2 billion commercial paper (CP) program at 'F1';
--\$200 million dealer remarketable securities at 'A'/'F1';
--\$2 billion revolving credit facility at 'A';
--Senior unsecured notes and debentures at 'A'.
The Rating outlook is Stable.