Why Fitch downgraded Nestle to AA-


Fitch Ratings said it has downgraded Nestle SA’s Long-Term Issuer Default Ratings (IDR) and senior unsecured ratings to ‘AA-‘ from ‘AA’,

However, Fitch Ratings said it affirmed the company’s Short-Term IDR at ‘F1+’. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is available at the end of this commentary.

Fitch said the downgrade of Nestle followed the announcement of a CHF20 billion share buy-back programme commencing from 4 July 2017. This will increase funds from operations (FFO) adjusted net leverage to around 2.2x by 2020 and reduce free cash flow (FCF) margin to an average of 2.7%, weakening the group’s financial flexibility. Fitch expects the operating environment to remain challenged by innovation, changing consumer habits and slowing organic growth.

On a positive note, Fitch said the ratings of Nestle continue to reflect the stability and strength of its business as the world’s largest food company, benefiting from scale and geographic diversification. The group is well-placed to continue defending its operational scale and market share, despite more subdued growth potential and changes in supply chain dynamics, and to improve margins, thus supporting our Stable Outlook.

Fitch conservatively expects profit margins to increase only moderately by 2020. In line with its peer Unilever NV/PLC (A+/Negative), we expect Nestle to be able to identify cost efficiencies and to achieve some margin uplift. However, this will likely take time to deliver and involve execution risk. However, we estimate that FFO margin will decline to 14% through to 2020 from an average of 15% during 2012-2016 due to higher cash interest and tax costs. This, together with by capex (including intangibles) remaining above 5% of sales, will constrain FCF margin (after dividends) to an average 2.7% over 2017- 2020, below our prior negative sensitivity of 3%

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