OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to PepsiCo, Inc.'s (PepsiCo) \\$3 billion multi-tranche offering. The issuance includes \\$450 million 1.0% and \\$700 million floating rate notes both due 2017, \\$1.1 billion 2.15% notes due 2020, and \\$750 million 4.45% senior notes due 2046. The Rating Outlook is Stable. Net proceeds from the offering will be used for general corporate purposes, including the repayment of commercial paper. PepsiCo had approximately \\$31.8 billion of total debt including \\$2.2 billion of commercial paper at the end of the third quarter 2015.

The notes will be issued by PepsiCo under the indenture dated May 21, 2007 and will rank equally with PepsiCo's senior unsecured obligations. Indentures include covenants for limitations of liens including a carve-out such that the aggregate amount of secured debt does not exceed 15% of consolidated net tangible assets and conditions related to consolidation, mergers or sales of assets. PepsiCo is not bound by any financial covenants. The senior notes are callable by PepsiCo, subject to a make-whole provision.

KEY RATING DRIVERS

Brand Strength and Scale

PepsiCo's ratings reflect its considerable financial flexibility, substantial cash flow, significant scale, product diversification including strong margins in its Frito-Lay North America segment, increasing exposure to faster growing emerging markets, and position as the world's second largest food and beverage company. A little over half of PepsiCo's more than \\$64 billion in last 12 months net revenue is derived from snacks. Beverages generate the remainder of the revenue with carbonated soft drinks comprising less than 25% of 2014 total revenue. Approximately half of PepsiCo's revenue is generated outside of the United States. PepsiCo's brand strength is demonstrated by its portfolio which consists of 22 brands, including Pepsi, Gatorade, Lay's, Doritos, and Quaker, with more than \\$1 billion in annual retail sales, which are typically No. 1 or No. 2 in their respective categories.

PepsiCo's financial profile is supported by the strong cash generation derived from its brand strength and high margins. Annual cash flow from operations (CFFO) and free cash flow (FCF) have averaged \\$9.4 billion and \\$3.1 billion, respectively, for the past four years. Fitch expects PepsiCo to generate CFFO in the low-to-mid \\$10 billion range and FCF in the low-to-mid \\$3 billion range for 2015 which is supported by its cost savings initiatives. LTM FCF was \\$3.8 billion. PepsiCo's primary goals are investing in its business, returning cash to shareholders, and maintaining credit ratings that provide ready access to global capital and credit markets including tier 1 commercial paper (CP).

Aggressive Financial Strategy

PepsiCo's financial strategy, historically viewed as aggressive, is also factored into its ratings. PepsiCo increased shareholder-friendly initiatives during 2014 by increasing total dividends and stock buybacks by more than \\$2 billion to \\$8.7 billion, or approximately 35%, due in part to activist investor pressure. Expectations for 2015 are similar at approximately \\$9 billion, the high end of PepsiCo's initial guidance given the company's likely increasing confidence with cash generation this year. Fitch views these plans negatively from a credit perspective, as debt-funded share repurchases can pressure the balance sheet, leaving modest ratings headroom. Negative rating triggers include a more aggressive share repurchase policy that leads to sustained leverage in excess of the mid 2x range. Leverage at the end of the third quarter 2015 was approximately 2.5x.

During the fourth quarter 2014, PepsiCo remitted \\$6 billion of international cash to the U.S. through a return of basis to repay CP borrowings, which Fitch viewed as a credit positive. This return-of-basis and debt repayment resulted in lower than expected leverage of 2.2x compared with Fitch's expectations of 2.4x - 2.5x. PepsiCo's leverage is modestly higher than similarly rated companies but ratings are supported by, as mentioned previously, the company's substantial and stable FCF, significant scale, diversification, and brand leadership.

PepsiCo pursued a return-of-basis distribution, which has negligible tax consequences, as a result of a build-up in foreign cash. Fitch generally believes multi-nationals may be reluctant to repatriate foreign earnings due to tax consequences. Absent additional return-of-basis distributions, Fitch estimates PepsiCo will need to borrow at least \\$3.5 billion domestically in 2015 due to the considerable cash requirements associated with the \\$5 billion share repurchase program, the \\$4 billion annual dividend, and domestic capital investment in excess of \\$1 billion. For 2015, PepsiCo's total debt has increased by approximately \\$3 billion and has repurchased approximately \\$3 billion in shares. Whether PepsiCo would consider additional return-of basis distributions is uncertain. Fitch projects PepsiCo's leverage will remain relatively stable approximating 2.5x at the end of 2015.

Operating Challenges

For the quarter ended Sept. 5, 2015, revenue fell 5% to \\$16.3 billion and operating income fell 50% to \\$1.4 billion on a reported basis, Organic revenue growth, which excludes a 12% negative impact from currency, increased 7% due to 6% pricing and 1% volume growth. Volumes were positive in all divisions except Europe, Sub-Saharan Africa. Excluding the \\$1.4 billion impairment charge related to the deconsolidation of PepsiCo's wholly-owned subsidiary in Venezuela, operating income decreased 2% due to higher operating costs, unfavorable foreign exchange, commodity inflation, and higher advertising and marketing expenses.

PepsiCo's challenges include global concern with health and wellness trends, increased excise taxes on its products in certain markets, the maturity of its categories in developed markets, and negative sentiment toward artificial sweeteners that led to U.S. diet carbonated soft drink (CSD) volume declines in the upper single digits.

PepsiCo's decision to remove aspartame from Diet Pepsi is an acknowledgment of the challenges facing the industry and the more negative sentiment specifically toward that product versus other artificial sweeteners. Whether this change fully addresses consumer concerns around Diet Pepsi and can stabilize declines remains uncertain. As such, Fitch believes volume declines could continue, albeit potentially more modestly, with artificially-sweetened beverages over the long term. Several of PepsiCo's developed markets have stagnant or declining per capita CSD consumption trends, weak economies and/or low population growth. Weak volume trends in developed markets places more dependence on emerging markets which recently have experienced volatility and slowing growth although pricing has remained mostly rational in key developed markets which has allowed PepsiCo to increase price.

New product innovation will also be key to stemming concerns around health and wellness and consumers' growing preference away from artificial ingredients, thus potentially increasing the firm's longer-term operating risk. PepsiCo maintains a good breadth of products across its beverage segment with strong positions in its non-carbonated soft drinks to balance the declines within its CSD portfolio. PepsiCo and the rest of the industry must continue to successfully develop new beverage products that are healthier, natural sweetener-based with lower calorie options to evolve their portfolios although innovation has also focused on premium, higher calorie craft-like beverages. Fitch anticipates that innovation will not fully ameliorate the continued CSD declines in some developed markets due to changing habits that are causing some consumers to leave the category for healthier options.

Operationally, PepsiCo is focused on increasing brand support to grow market share, expanding its emerging market presence, growing its nutrition business, reducing overhead, and leveraging technology and processes across its organization. PepsiCo has made noticeable progress on this strategy; therefore, Fitch believes the company's strategic initiatives should help it improve trends. Furthermore, PepsiCo's five-year \\$5 billion productivity cost savings program, if achieved, should provide the company significant financial flexibility to either reinvest into the business and/or increase cash generation.

KEY ASSUMPTIONS

Additional key assumptions within the 2015 rating case for the issuer include:

--Total revenue decline of 6% with underlying organic revenue growth of roughly 4% and an approximate 10% unfavorable impact from foreign currency. Assumptions includes a combined 1% revenue decline in the food segments of Frito-Lay, Quaker Foods and Latin America Foods (20% decrease due to foreign exchange). In the PepsiCo America Beverages segment, assumptions include a 1% decline in revenue (3% decrease due to foreign exchange). In the Europe segment, assumptions include a 24% decline in revenue (26% decrease due to foreign exchange).
--PepsiCo retains at least \\$1 billion of domestic cash throughout the forecast;
--In 2015, PepsiCo increases debt by approximately \\$3.5 billion to fund domestic cash requirements of at least \\$10 billion including \\$5 billion in share repurchases, \\$4 billion in dividends and \\$1.2 billion in capital investment;
--PepsiCo does not remit any additional foreign cash for return of basis, allowing offshore cash to increase in excess of \\$10 billion;
--FCF for 2015 is in the low-to-mid \\$3 billion range reflecting total capital spending of \\$3 billion or less;
--Total leverage increases to approximately 2.5x in 2015.

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

--Total debt-to-operating EBITDA below 2x and Fitch's belief that PepsiCo would manage its balance sheet to sustain an 'A+' rating. Currently, Fitch does not view this as likely given the increase in cash returned to shareholders.

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

--Significant debt-financed acquisitions and/or deteriorating operating performance that causes total debt-to-operating EBITDA to be sustained above the mid-2x level;
--Substantial and sustained declines in cash flow would also likely prompt negative rating actions;
--Financial policy changes including higher level of share repurchases or dividends that would increase financial leverage.

LIQUIDITY

Liquidity, Maturities and Guarantees

PepsiCo maintains good liquidity. PepsiCo's cash and short-term investments totalled \\$10.7 billion at the end of the third quarter 2015, of which \\$9.8 billion was offshore. During the third quarter 2015, PepsiCo deconsolidated the wholly-owned Venezuelan subsidiary due to the increasingly restrictive exchange control regulations and substantially reduced access to dollars through the official currency exchange markets that negatively affected the ability for the Venezuelan business to pay dividends. Due to the deconsolidation, PepsiCo's cash, cash equivalents and short-term investments will no longer include the cash balance of its Venezuelan subsidiary which was \\$568 million as of the end of the third quarter of 2015. PepsiCo has a combined capacity of \\$7.445 billion under its 364-day and five-year revolving credit facilities maturing in 2016 and 2020 respectively that remain undrawn. Upcoming maturities of long-term debt include \\$3.1 billion in 2016.

PepsiCo guarantees all of the senior notes of its bottling subsidiaries - Pepsi-Cola Metropolitan Bottling Company (PMBC), which is wholly owned by PepsiCo, and Bottling Group, LLC (wholly owned by PMBC). While the notes of PMBC and Bottling Group, LLC are structurally superior to the notes issued by PepsiCo, Inc., Fitch has chosen not to make a distinction in the ratings at the single 'A' level as default risk is very low.

FULL LIST OF RATING ACTIONS

Fitch currently rates PepsiCo and its subsidiaries as follows:

PepsiCo (Parent)
--Long-term Issuer Default Rating (IDR) at 'A';
--Senior unsecured debt at 'A';
--Bank credit facilities at 'A';
--Short-term IDR at 'F1';
--Commercial paper program at 'F1'.

Pepsi-Cola Metropolitan Bottling Company, Inc. (Operating Company/Intermediate Holding Co.):
--Long-term IDR at 'A';
--Guaranteed senior notes at 'A'.

Bottling Group, LLC (Operating Company):
--Long-term IDR at 'A';
--Guaranteed senior notes at 'A'.

The Rating Outlook is Stable.