Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of McDonald's Corporation (NYSE: MCD) at 'A/F1'. The Rating Outlook has been revised to Negative from Stable.

At Dec. 31, 2014, McDonald's had approximately $15 billion of total debt. A full list of ratings is provided at the end of this release.

Negative Outlook:

The Outlook revision is due to persistently weak global same-store sales (SSS), declining store-level profitability, and increased leverage. Global SSS were negative 1% in 2014, after being flat at 0.2% in 2013, with guest counts declining 1.9% in 2013 and 3.6% in 2014. Consolidated company-operated restaurant margin contracted 160 basis points to 15.9% in 2014, continuing a multi-year decline that began in 2010. Lastly, total debt/EBITDA and total adjusted debt/EBITDAR were 1.5x and 2.6x, respectively, at Dec. 31, 2014 up from 1.4x and 2.4x in 2013.

Fitch's current rating incorporated that total debt/EBITDA and total adjusted debt/EBITDA (rent-adjusted leverage) would approximate 1.5x and 2.5x, respectively, while considering McDonald's leading global market position, brand strength, system health, and significant financial flexibility. However, recent SSS trends, market share losses, and the decline in operating income results in little room for further downside.

The modest increase in leverage during 2014 was due to an 8% decline in constant currency operating income and $1.5 billion of incremental debt to help fund the company's $18 - $20 billion three-year cash shareholder return target. Fitch's base case projection is that total debt/EBITDA and rent-adjusted leverage will increase to 1.6x and 2.7x, respectively, in 2015 and 2016 due to flat SSS, limited operating income growth and modestly higher debt to partially finance share repurchases.

Fitch believes McDonald's sales will gradually benefit from increasing real disposable income in the U.S., particularly for low-to-middle income consumers, and brand-level initiatives around the world but views continued market share losses as likely in 2015. Restaurant margins will also remain pressured given weak sales and rising U.S. labor costs. Pricing remains limited due to relatively low inflation, heightened competition, and still weak economic conditions in most of Europe (which represented 40% of revenue and 41% of operating income in 2014). McDonald's expects modest 1.5% - 2% commodity inflation in the U.S. and Europe for 2015.

KEY RATING DRIVERS

Same-Store Sales and Market Share Trends

As mentioned previously, McDonald's ratings incorporate its position as the world's largest restaurant chain, with about $88 billion in system sales, 36,000 plus units, and over $27 billion of revenue. However, global SSS have been weak for two consecutive years. Market share losses have occurred in the U.S. but, according to the company, trends vary across Europe.

McDonald's attributes economic conditions, heightened competition, and unanticipated business interruptions caused by a supplier issue affecting the Asia Pacific, Middle East, and Africa (APMEA) segment, and temporary store closures in Russia for its challenges. Fitch also views modest slippage in restaurant service, less effective promotions, and negative perceptions regarding the brand's food among certain consumer demographics that prefer less processed food with fresh ingredients as drivers. McDonald's intensified its focus on value in 2013 and 2014 in order to drive traffic but annual guest counts became increasingly negative across most major geographies.

Effectiveness of Brand Initiatives

McDonald's new CEO, officially as of March 1, is expected to accelerate efforts to improve the brand image globally. In December 2014, the company detailed a strategy to regain SSS growth in its core U.S. market. Plans entail simplifying the menu to improve service and address local customer preferences, and creating the Experience of the Future which includes, among other initiatives, a new Create Your Taste (CYT) customizable burger platform. McDonald's also remains focused on improving SSS in other priority markets including Germany, Japan, and Australia.

Fitch views a cohesive and aggressive system-wide effort to improve service, emphasize food quality, and provide locally-relevant menu variety as necessary catalysts for SSS growth. McDonald's plan to launch CYT in the up to 2,000 U.S. restaurants by the end of 2015 will likely have a limited near-term positive impact on the company's image in the burger category as it only represents 14% of total domestic locations. McDonald's brand recovery efforts in Japan will also take time to resonate with consumers because of a high level of competition, particularly in the convenience channel, and food quality incidents beyond the July 2014 APMEA supplier challenge.

Substantial but Decelerating Cash Flow Growth

McDonald's generates substantial cash flow from operations at $6.7 billion in 2014. CFO declined 5% in 2014 due to lower sales and operating income, after growing at an 8% CAGR from the launch of the firm's Plan to Win strategy in 2003 to $7.1 billion in 2013. Free cash flow (FCF - defined as CFO less capex less dividends) remained meaningful at $931 million due to lower capex but was below the company's annual average of $1.5 billion from 2010 to 2013.

Fitch expects CFO trends to stabilize in 2015 and then grow at a low single-digit rate in 2016. FCF in 2015 will be enhanced by reductions in capex as McDonald's slows unit growth in its most challenged countries and focuses on regaining sales momentum but debt reduction is not anticipated.

McDonald's expects to spend about $2 billion in capex during 2015, down from $2.6 billion in 2014 and the lowest level in five years. Capex will be allocated roughly 50/50 between new units and reinvesting in existing locations, as modernizing the customer experience remains a key global priority. Net restaurant additions will be between 600 and 700, representing about 1.8% expansion in 2015.

Increasingly Aggressive Financial Strategy

Fitch views McDonald's financial strategy as increasingly aggressive given negative SSS trends and the loss of market share. McDonald's has publicly reiterated plans to return $18 billion - $20 billion in aggregate dividends and share repurchases from 2014 through 2016, a 10% - 20% increase versus payouts during the three-years ended 2013, despite weaker than expected operating results. Fitch views McDonald's reduction of new unit capex as prudent given weak sales and declining margins. As mentioned previously, FCF will be enhanced, but debt reduction is not anticipated.

Cohesive Operating Framework, Franchising

Fitch believes the continued alignment of corporate, franchisees and suppliers to meet customer needs as critical to McDonald's success. The company's significant scale is a benefit, providing bargaining power with procurement, unmatched advertising capability, and convenient locations for consumers. However, the ability to quickly adjust to consumer trends is likely difficult due to its massive infrastructure.

McDonald's 81%/19% global mix of franchised to company stores at Dec. 31, 2014 supports cash flow, augments corporate margins, and assists with the rollout of new system initiatives. High-margin royalties and contractual rent payments from franchising represented 34% of revenue in 2014. McDonald's is on track to refranchise 1,500 units from 2014 to 2016, mainly across Europe and APMEA, but its ownership mix is not expected to change materially leaving company-owned stores directly exposed to rising costs.

McDonald's owns roughly 45% of the land and about 70% of the buildings within its system. Fitch believes the company's strong asset base solidifies its relationship with franchisees, increases the stability of its cash flow, reduces contingent liabilities, and distinguishes McDonald's from its peers.

Financial Flexibility, Liquidity, and Maturities:

McDonald's financial flexibility is supported by its substantial operating cash flow, good FCF generation, ready market access, and high level of liquidity. At Dec. 31, 2014, McDonald's had $4.6 billion of liquidity consisting of $2.1 billion of cash, of which $1.2 billion was held offshore, and availability under an undrawn $2.5 billion committed revolver expiring December 2019. The company had $200 million of commercial paper (CP) outstanding under its $2.5 billion CP program at year end.

About 60% of McDonald's $15 billion of debt at Dec. 31, 2014 was U.S. denominated and 40% was foreign denominated. Upcoming debt maturities approximated $1.1 billion in 2015, $823 million in 2016, and $1 billion in 2017 based on year-end foreign exchange rates. Fitch views maturities as manageable given McDonald's strong market access and annual FCF. McDonald's plans to refinance its 2015 maturities.

KEY ASSUMPTIONS

--SSS are flat in 2015 and growth resumes to the low single-digit level by 2016;

--Company-operated restaurant margins stabilize by 2016;

--Operating cash flow stabilizes in 2015 and grows at a low single-digit rate thereafter;

--Total debt-to-operating EBITDA and total adjusted debt-to-operating EBITDAR (defined as total debt plus 8x gross rents-to-operating EBITDA plus gross rents) approximates 1.6x and 2.7x, respectively, in 2015 and 2016;

--FCF approximates $1 billion or more annually.

RATING SENSITIVITIES

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

--If Fitch ascertains that global SSS will be negative in 2015 and market share trends do not stabilize;

--Management demonstrates an unwillingness to pull back on share repurchases if sales trends continue to deteriorate;

--Total debt-to-operating EBITDA and total adjusted debt-to-operating EBITDAR sustained above 1.5x and 2.5x, respectively.

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

--An upgrade is not likely in the near term, given recent weak SSS trends, on-going margin contraction, and increased leverage; --The Rating Outlook could be revised to Stable if SSS are better than Fitch anticipates, market share trends stabilize, or leverage is maintained below current levels.

Fitch has affirmed its ratings on McDonald's as follows:

--Long-term IDR at 'A';

--Bank credit facilities at 'A';

--Senior unsecured debt at 'A';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

The Rating Outlook has been revised to Negative from Stable.

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

Applicable Criteria and Related Research:

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

--'2015 Outlook: U.S. Restaurants - Bucking the Status Quo, Brands Transform to Satisfy Astute Diners, Arduous Investors' (December 2014);

--'McDonald's Corporation - Ratings Navigator' (February 2015).

Applicable Criteria and Related Research:

2015 Outlook: U.S. Restaurants (Bucking the Status Quo, Brands Transform to Satisfy Astute Diners, Arduous Investors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=839828

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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980723

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Fitch RatingsPrimary AnalystCarla Norfleet Taylor, CFASenior Director+1-312-368-3195Fitch Ratings, Inc.70 W. Madison StreetChicago, IL 60602orSecondary AnalystJudi M. Rossetti, CFA/CPASenior Director+1-312-368-2077orCommittee ChairpersonMichael WeaverManaging Director+1-312-368-3156orMedia Relations:Alyssa Castelli, New York, +1 212-908-0540Email: alyssa.castelli@fitchratings.comElizabeth Fogerty, New York, +1 212-908-0526Email: elizabeth.fogerty@fitchratings.com