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Fitch assigns BBB+ rating to Starbucks' debt offering

Fitch Ratings on Aug. 8 assigned a BBB+ rating to Starbucks Corp.'s $3 billion multi-tranche issuance of seven-year, 10-year and 30-year senior unsecured notes, with a stable outlook.

The rating agency said the coffee chain will use proceeds from the offering to fund capital return initiatives, including share repurchases and dividends, and for other general corporate purposes, including business expansion or funding potential acquisitions.

The notes, which will be issued under Starbucks' Sept. 15, 2016 indenture, will rank equally with existing senior unsecured debt.

Fitch expects the Seattle-based company's total debt to increase by more than $9 billion in the three years ending fiscal 2020 and leverage to increase in low 3x range over the short-to-intermediate term, compared to 2.2x at the end of fiscal 2017.

Fitch believes the new agreement with Nestlé SA will drive positive long-term benefits for Starbucks with higher growth to offset the initial operating income loss. However, it noted that it is concerned about the slowdown in transactions. To sustain improvement in comps, the agency said Starbucks needs to execute its key digital initiatives to expand relationships and drive transaction growth.

The rating agency expects the coffee chain's revenue to grow approximately 10% in fiscal 2018 and in the mid-single-digits in fiscal 2019 due to the impact of the Nestle licensing agreement. Thereafter, revenue growth is projected in the range of 7%, expecting annual comparable sales growth in the low 2% range and an approximate 5% contribution from new stores.

Operating EBITDA is expected to be approximately $5.2 billion in fiscal 2018 and grow at a mid-to-high-single-digit CAGR to over $6 billion by fiscal 2020.

Meanwhile, annual free cash flow after dividends is projected to be over $700 million in fiscal 2018, increasing roughly to $1 billion by 2020. Total adjusted debt-to-operating EBITDAR is projected to increase to the low 3x range and sustain that level over the forecast period.

The global coffee giant recently reported third-quarter earnings that beat analysts' expectations, but the company also lowered the top end of its full-year EPS outlook.