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Moody's changes Nestlé ratings outlook to negative over Starbucks deal

Moody's Investors Service on May 10 announced that it changed Nestlé SA's ratings outlook to negative from stable, after the food manufacturer agreed to sell Starbucks Corp. products through its global distribution network.

The rating agency, however, affirmed Nestlé's issuer rating of Aa2 and its subsidiaries' Aa2/Prime-1 senior unsecured long-term and short-term ratings.

The $7.15 billion deal, which is set to be fully funded with debt, can further deteriorate the Swiss company's weak credit metrics since Nestlé has decided not to scale down its ongoing CHF 20 billion share repurchase program, according to Lorenzo Re, Moody's vice president and senior analyst.

As a result, the financial services firm expects a below-20% drop in Nestlé's retained cash flow to net debt ratio for 2019 and 2020, lower than Moody's 30% guidance for the company's Aa2 rating. It also predicts a 36% to 40% decline, down from 56%, in Nestlé's funds from operations to net debt.

Moody's added that it expects a low to mid-single-digit growth rate for the manufacturer's organic revenue over the next two to three years, slightly lower than Nestlé's target of a mid-single-digit organic sales growth rate in 2020.