Fitch Ratings on Sept. 20 affirmed the long-term issuer default rating and senior unsecured rating of Nestlé SA, citing the "stability and strength" of the Swiss consumer goods giant.
The rating agency said Nestlé's position benefits from its scale and geographic diversification, adding that it is well-positioned to continue growing its organic sales growth and improving its profitability.
The agency assigned a negative outlook to Nestlé to reflect the potential for leverage to exceed levels as a result of investments on mergers and acquisitions.
The rating agency said it expects the food giant to "continue proactively rebalancing its brands portfolio through bolt-on M&A and divestments" in a bid to "reduce the relevance of non-core operations" and focus on the core business of food, beverages and nutritional health products to "accelerate its organic growth capability."
Fitch said future ratings actions depend on how the company would deploy the disposal of Nestlé Skin Health SA, such as share buybacks, debt reduction or more M&A deals. Nestlé sold the unit to a consortium led by Swedish private equity firm EQT Partners AB earlier this year for CHF10.2 billion.
"Should it decide to apply proceeds towards debt repayment, its rating headroom would improve substantially but we believe that Nestle could consider a combination of options, probably prioritising shareholder remuneration and acquisitive growth over deleveraging. This expectation is currently reflected in the Negative Outlook on the rating," the rating agency said.
Fitch said it could revise the ratings to stable if the company's funds from operations adjusted net leverage remains below 2.5x, if free cash flow margin stays between 2.5% and 3%, if EBITDA margin grows toward or above 20% by 2020, or if funds from operations fixed-charge coverage exceeds 9x.
Conversely, the agency said it could downgrade the ratings if Nestlé's funds from operations adjusted net leverage exceeds 2.5x, if free cash flow deteriorates after dividends, if free cash flow margin falls below 2.5x, if organic growth deteriorates to below 3%, if EBITDA margin fails to reach 20% by 2020, or if funds from operations fixed-charge coverage falls below 9x.
