DBRS Downgrades Nestlé S.A. to AA (low) from AA Following Change to Its Capital Structure

DBRS Limited (DBRS) has today downgraded the Issuer Rating of Nestlé S.A. (Nestlé or the Company) to AA (low) from AA. The trend is Stable. Nestlé Capital Canada Ltd.’s Commercial Paper Rating is unaffected, remaining at R-1 (middle) with a Stable trend.

The downgrade follows Nestlé’s announcement on June 27, 2017, that it has completed a comprehensive review of its capital structure and approved a share buyback program of up to CHF 20 billion, to be completed by the end of June 2020, which DBRS believes is indicative of the fact that the Company is no longer committed to maintaining financial leverage at a level consistent with the AA rating. The share buybacks are expected to be weighted toward the back end of the time period to provide greater flexibility should Nestlé choose to undertake any sizable acquisitions over this time frame. If any such sizable acquisitions take place, the share buyback program would be adapted accordingly. Based on current projections, Nestlé expects net debt-to-EBITDA of approximately 1.50 times (x) in 2020.

DBRS considers this shift to more aggressive financial management to be negative for Nestlé’s credit rating profile, and while the Company can use cash on hand as well as free cash flow and proceeds from possible divestitures to complete a portion of the share buybacks, it is nevertheless expected to result in a material increase in balance sheet debt. DBRS estimates that the increase in balance sheet debt associated with the share buybacks will result in significantly weaker credit metrics (i.e., lease-adjusted net debt-to-EBITDAR above 1.70x versus approximately 1.04x as at year-end F2016) that are no longer consistent with the current AA rating (i.e., lease-adjusted net debt-to-EBITDAR below 1.50x).

Nestlé’s business risk profile remains unchanged from DBRS’s last review, and its rating continues to be supported by its industry-leading portfolio of global brands and position as the world’s largest food company with exceptional diversification. Nestlé’s rating also reflects its exposure to volatile commodity costs and foreign currencies as well as the mature nature of many of its products and markets, which require significant investment for continued growth, balanced by its presence in emerging markets and focus on higher-growth categories (i.e., coffee, pet care, infant nutrition, bottled water and consumer health care).

Should Nestlé’s credit metrics weaken further (i.e., lease-adjusted net debt-to-EBITDAR meaningfully above 2.0x) as a result of more aggressive financial management and/or weaker-than-expected operating performance, a further negative rating action could result. Although unlikely, should Nestlé return to a financial policy consistent with the AA rating (i.e., lease-adjusted net debt-to-EBITDA below 1.50x) while maintaining solid operating performance, a positive rating action could result.

Notes:
All figures are in Swiss francs unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Consumer Products Industry, which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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