McDonald's Corp. Outlook Revised To Negative On Coronavireus-Related Stress On Credit Quality; New Debt Rated 'BBB+'

  • McDonald's Corp. announced a $3.5 billion U.S. medium-term notes offering in tranches ranging from five to 30 years, with a goal of shoring up liquidity and pre-funding maturities against the backdrop of severe global disruption facing the restaurant industry due to the coronavirus pandemic.
  • We are affirming the 'BBB+' issuer credit rating on McDonald's and revising the outlook to negative from stable to reflect the potential for an extended period of credit-measure weakness if COVID-related stress extends longer than we anticipate. We are also affirming the 'A-2' short-term rating on the company.
  • At the same time, we assigned our 'BBB+' issue-level rating to the proposed issuance, which we consider prudent, proactive liquidity management that demonstrates McDonald's high standing in credit markets.
  • The negative outlook reflects the risk that extended stress on operating performance combined with shareholder returns could result in an expectation for prolonged credit measure deterioration and a downgrade. We do note that McDonald's has currently suspended its share repurchase program.
NEW YORK (S&P Global Ratings) March 25, 2020--S&P Global Ratings today took the rating actions listed above. The outlook revision reflects the risk that sustained operating weakness from the coronavirus pandemic and an insufficiently conservative approach to shareholder rewards could lead to credit measures stretched through 2021. McDonald's benefits from its broad global scale and strong financial position, which we believe will position it to weather a period of significant stress associated with the COVID pandemic and a global economic downturn, while being on track to return credit measures to appropriate levels in 2021. We assume significant topline stress in the second quarter of this year will abate but still anticipate full year sales declines in the double-digits. Under this base case we still anticipate the company will manage expenses and substantial free operating cash flow.
The negative outlook reflects our view that performance is highly pressured though very uncertain in the coming year, with the potential for COVID-related stress to extend in severity and length. If that were to occur, McDonald's approach to shareholder returns--importantly dividends and share repurchases--could delay anticipated credit measure improvement and a rebound, leading us to lower the ratings.
We would lower the rating if we no longer expect the company will manage credit measures to appropriate levels by the end of 2021, including debt to EBITDA of around 4x or less. We believe McDonald's has many levers to manage its credit measures. Extended delays stemming from worse operating performance that is not offset by the company could lead us to view the company as incrementally more aggressive from a financial policy perspective.
We could revise the outlook to stable if the company is on track to return credit measures to more typical levels in 2021. This will largely depend on the depth and level of pandemic-related stress (and pace of rebound) on performance and McDonald's approach to shareholder returns.
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