The Seattle-based chain now has more US locations than McDonald
NEW YORK: Moody's Investors Service has downgraded Starbucks Corporation's senior unsecured ratings to Baa1 from A3.
In addition, Moody's affirmed the company's short term commercial paper rating at Prime-2. The outlook is negative.
The downgrade was prompted by Starbucks decision to materially increase debt to support returns to shareholders. Shareholder returns are now targeted at $25 billion -- up from $15 billion in November 2017 -- over the three year period from 2018 through 2020.
This change in policy will be partially funded with additional debt and result in a deterioration in credit metrics that are more representative of the revised ratings.
"The material increase in Starbuck's fixed shareholder return target will result in significantly higher debt levels and weaker credit metrics at a time of operating challenges" stated Moody's Senior Credit Officer Bill Fahy.
“We estimate that the additional debt needed to fund the proposed shareholder returns will result in leverage exceeding 2.8 times and retained cash flow to total debt of around 20%.
"In addition, we remain concerned that Starbucks willingness to curtail shareholder returns in the event operating results fall short of expectations remains uncertain and could lead to a further deterioration in credit metrics," added Fahy.
Downgrades:
Issuer: Starbucks Corporation
Senior Unsecured Shelf Downgraded to (P)Baa1 from (P)A3
Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3
Outlook Actions:
Issuer: Starbucks Corporation
Outlook, Changed To Negative From Stable
Affirmations:
Issuer: Starbucks Corporation
Senior Unsecured Commercial Paper, Affirmed P-2
RATINGS RATIONALE
Starbucks benefits from its global brand strength, dominant position in the US specialty coffee segment, global diversification and significant scale. Starbucks new and innovative product offerings, greater day part diversity, well accepted loyalty program and digital initiatives have resulted in strong and consistent operating earnings and strong liquidity.
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