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Investing.com -- Today, Moody’s Ratings confirmed the A3 long-term issuer rating of UK-based consumer product company Reckitt Benckiser Group Plc (LON:RKT) (Reckitt) and its subsidiaries, Mead Johnson Nutrition Co., Reckitt Benckiser Treasury Services Plc and Reckitt Benckiser Treasury Services (Nederland) B.V. Simultaneously, the outlook for these entities was revised to stable from positive. The Prime-2 (P-2) backed commercial paper ratings and the A3 backed senior unsecured ratings of Reckitt Benckiser Treasury Services Plc, as well as the A3 backed senior unsecured ratings of Mead Johnson Nutrition Co. and Reckitt Benckiser Treasury Services (Nederland) B.V., were also affirmed.
The A3 rating and credit profile of Reckitt continue to reflect positively on the company’s strong operating margins, robust brands in defensive product categories, good geographical diversification, strong cash flow generation, and conservative financial policy. Moody’s expects Reckitt’s gross debt/EBITDA leverage, adjusted according to Moody’s standards, to stay at or below the 2.5x level, which would be considered positive for rating pressure.
However, currency challenges have limited recent revenue growth, and Moody’s does not anticipate mid-single digit percentage growth for the company in 2025 or 2026. The company’s Fuel for Growth program, while strategically important, will continue to see profit growth curtailed due to one-off costs. These factors have driven the decision to revise the rating outlook to stable from positive.
The ongoing litigation risk concerning the Nutrition division’s Enfamil Premature 24 product, which became apparent a year ago, continues to impact the company’s credit profile. Although US regulators stated in October 2024 that there is no definitive evidence that preterm infant formulas cause necrotizing enterocolitis (NEC), Moody’s believes it’s too early to determine the potential cash outflows related to the litigation. This uncertainty remains a constraint to any upward rating pressure.
The stable outlook reflects Moody’s base case expectations that Reckitt’s gross debt/EBITDA leverage will stay at or below 2.5x, and that the company’s competitive position will continue to support steady revenue growth and at least flat operating margins.
While the risk of credit negative developments related to the NEC litigation persists, an upgrade is unlikely. However, in due course, an upgrade may be considered if Reckitt’s leverage, adjusted according to Moody’s standards, is consistently below 2.5x, and the company demonstrates sustainably positive underlying earnings momentum.
Downward rating pressure could occur if Moody’s expected Reckitt’s adjusted leverage to consistently exceed 3.0x or its Retained Cash Flow/net debt to drop to the mid-teens in percentage terms or lower on a sustained basis. Additionally, significant deterioration in the company’s competitive position leading to revenue weakness or a sustained decline in operating margins could also trigger a downgrade.
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