Moody's on May 11 downgraded the credit rating of U.S. soft drink company Dr Pepper Snapple Group Inc., concluding a review initiated Jan. 29 when Dr Pepper announced its intention to merge with Keurig Green Mountain Inc. in a leveraging transaction.
The rating agency lowered Dr Pepper's ratings to Baa2 from Baa1 and affirmed its Prime-2 rating. Its rating outlook was negative, Moody's said.
It also assigned Baa2 ratings to $8 billion of proposed bonds expected to be issued in multiple tranches by Maple Escrow Subsidiary Inc., a wholly owned unit of Maple Parent Holdings Corp., which owns Keurig. Moody's assigned the same Baa2 rating to the senior unsecured bank debt of Maple Parent Holdings.
"The Baa2 rating reflects the good scale and diversity of the combined company, but also high leverage following the transaction as well as the potential for disruption as the two different cultures are merged," the rating agency said.
Initial leverage would be high for an investment-grade rating at a ratio of about 5.6x net debt to EBITDA, but the debt load would decline to lower levels within three years subject to synergies and working capital improvements, Moody's said.
It added that the negative outlook was a result of the execution risk to rapid deleveraging and integration risk in combining two distinct cultures.
In order to achieve an upgrade, the rating agency said that the company would have to successfully integrate the two businesses, produce solid operating profitability, sustain a ratio of net debt to EBITDA below 3x and show strong operating momentum.
Under the terms of the deal, Keurig plans to acquire Dr Pepper Snapple in a deal that will create a U.S.-based beverage giant with about $11 billion in annual sales.