CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Coca-Cola Enterprises, Inc.'s (CCE's) ratings as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB+';

--Short-term IDR at 'F2';

--Bank credit facility at 'BBB+';

--Senior unsecured notes at 'BBB+';

--Commercial paper at 'F2'.

The Rating Outlook is Stable. At Sept. 26, 2014, CCE had $4.1 billion of total debt.

KEY RATING DRIVERS

CCE's ratings reflect its stable cash flows, strong market position, and exclusive right to manufacture, sell and distribute Coca-Cola brand beverages in Western Europe. Coca-Cola products have leading market share that allows for premium pricing of the Coca-Cola brands within CCE's non-alcoholic ready-to-drink portfolio for each of its territories. In the LTM period ended Sept. 26, 2014, CCE generated approximately $8.4 billion of net sales with 64% coming from its largest two markets, Great Britain and France.

The ratings incorporate CCE's financial leverage, which is currently at the top end of Fitch's expectation for the rating category at 2.9x (total debt-to-operating EBITDA), and the firm's good free cash flow (FCF) generation. CCE has limited cushion within the rating given the higher leverage, as Fitch views the low- to mid-end of CCE's net leverage target of 2.5x to 3x as acceptable for the 'BBB+' rating.

CCE is managing through persistent headwinds with the macro environment in Western Europe which has been characterized by reduced consumer spending, higher unemployment, poor weather at times and the negative effects of austerity programs. In addition, the competitive environment has been challenging particularly in Great Britain. As such, consumer behavior and purchasing decisions remain shaped by post-recession aftereffects. Many consumers remain cash conscious, seeking good value for their spending patterns although brands remain important to consumers as non-alcoholic beverages do benefit from the growing premium trend.

Innovation & Digital Key Growth Drivers

Particularly with government focus on health and well-being, CCE will need to continue innovation efforts focused on products and packaging to expand the portfolio and offer consumers a wider variety of beverage options. CCE must position the company ahead of trends to meet or exceed growth targets and continue exploring alternative distribution avenues in order to adapt to the changing lifestyles of savvy shoppers. With traditional retailers struggling, the use of digital marketing is growing more important especially in the United Kingdom, which has one of the most mature online grocery markets in Europe.

Recent Operating Performance Challenged

During the third quarter ended Sept. 26, 2014, net sales decreased 3.5% on a currency-neutral basis to $2.1 billion. Volume decreased 4% during the quarter due primarily to macroeconomic softness and strong prior year volume comparisons. Declines occurred in both Coca-Cola trademark, still, and other sparkling beverage brands. For the quarter, comparable and currency-neutral operating expenses decreased 3% to offset topline pressure. CCE expects the current operating challenges will continue into 2015, thus constraining revenue growth prospects. As such, Fitch expects that competitive environment and challenged marketplace conditions could keep CCE below its long-term revenue growth target of 4%-6% for the next couple of years.

Leverage at High-End of Credit Metrics

CCE's credit metrics are in line with Fitch's expectations, but as mentioned previously, are at the high end, resulting in limited room in the rating. At Sept. 26, 2014, total debt-to-operating EBITDA was 2.9x and operating EBITDA-to-gross interest expense was approximately 12x. This translates to slightly less than the midpoint of CCE's 2.5x-3x net leverage target. Longer-term Fitch expects CCE will sustain and manage within the midpoint of its net debt leverage targets. Sustained gross leverage of approximately 3x or less is acceptable for the current ratings. Funds from operations (FFO) adjusted leverage is expected to be in the upper 3x range.

Higher long-term leverage is a concern as Fitch anticipates that acquisitions may occur given CCE's desire for franchise territory expansion. Ratings would be pressured in the event of a large debt-financed transaction without the use of equity as leverage (total debt-to-EBITDA) would increase well above 3x.

Fitch believes CCE greatly values its current 'BBB+' and 'F2' long- and short-term ratings. Therefore, in the case of a large debt-financed acquisition, expectations are that CCE would use FCF to quickly reduce leverage back to its targeted range in a 12-to-18-month timeframe. In addition, Fitch expects CCE would limit share buybacks if leverage increased as a result of an acquisition and/or if any material deterioration in future operating performance occurred.

At Sept. 26, 2014, CCE had issued $242 million in commercial paper (CP). Material maturities in 2015 and 2016 include $475 million of 2.125% notes and $250 million of 2% notes, respectively. A material portion of CCE's debt obligations are euro-denominated at approximately 54% of total long-term debt. Fitch expects the company will continue to narrow the currency mismatch and foreign exchange risk between the firm's debt balances and its cash flow by refinancing with euro-denominated debt when the opportunity arises.

Good Liquidity

At Sept. 26, 2014, CCE had good liquidity of nearly $1.2 billion, inclusive of $216 million of cash and full availability under the firm's $1 billion multi-currency credit facility, expiring in September 2017. FCF (cash from operations less capital spending less dividend) for the LTM period ended Sept. 26, 2014 was $246 million. CCE's 2014 pre-dividend FCF guidance of at least $400 million is higher than the past three years due in part to benefits from U.S. tax credits which will reduce U.S. taxes, lower cash restructuring costs and reduced capital spending.

CCE has aggressively increased the dividend the past four years from $0.48 to $1.00, with the latest increase of 25% per share for 2014. Fitch expects annual dividend payments approaching $250 million for the year to translate to a manageable 35% dividend payout ratio (dividend-to-earnings). Over the longer term, Fitch expects CCE will increase the dividend payout ratio to its target of 40%. CCE also has aggressively repurchased an average of almost $850 million shares annually during the last four years. CCE repurchased $800 million shares during the first three quarters of 2014.

Going forward, with CCE nearing the midpoint of its net leverage target, Fitch expects share repurchases should begin to moderate somewhat becoming more dependent on FCF generation and growth in EBITDA.

RATING SENSITIVITIES

Fitch does not currently expect a positive rating action based on CCE's current financial policies. Future developments that could, individually or collectively, lead to a positive rating action include:

--Gross debt-to-operating EBITDA consistently below 2.3x or net leverage below management's targeted range of 2.5x-3x due to operating income growth and continued strong FCF generation that results in debt reduction;

--Significant additional geographic diversification concurrent with lower leverage and/or an equity stake and board representation by The Coca-Cola Company.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Gross debt-to-operating EBITDA sustained above 3x;

--Persistent declines in volumes concurrent with material margin compression and significantly lower FCF and EBITDA that could be driven by additional material dividend increases or high level of share repurchases, the mature economies, and persistent macroeconomic headwinds;

--In the event of weak operating performance, if CCE decided not to moderate share repurchases and/or potentially reduce debt to ensure leverage metrics were within Fitch's target range for a 'BBB+' rating;

--Leverage remains outside its targeted range for longer than a 12-to-18-month period following a material debt-financed acquisition;

--CCE does not take adequate steps to mitigate the effects of foreign exchange risk;

--Change in financial policy by continuing material debt-financed share repurchases that increases leverage.

Additional information is available at 'www.fitchratings.com'

Disclosure: Veronique Morali, Vice Chairman of Fitch Group, Inc. and a member of its board, is also a member of the board of Coca-Cola Enterprises, Inc. Ms. Morali does not participate in any Fitch rating committees, including that of Coca-Cola Enterprises, Inc.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Parent and Subsidiary Rating Linkage' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=938895

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