Credit Opinion for PepsiCo.

CORPORATES

CREDIT OPINION 26 June 2017

Update

RATINGS

PepsiCo, Inc. Domicile Purchase, New York,

United States

Long Term Rating A1

Type Senior Unsecured - Fgn Curr

Outlook Stable

Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date.

Contacts

Linda Montag 212-553-1336 Senior Vice President [email protected]

Peter H. Abdill, CFA 212-553-4024 MD-Corporate Finance [email protected]

PepsiCo, Inc. Update to Discussion of Key Credit Factors

Summary Rating Rationale PepsiCo's A1 long-term senior unsecured rating reflects its strong snack food and beverage franchises, extensive global footprint, and solid innovation pipelines. It also reflects its efficient operations, and an extensive multifaceted distribution network, as well as its excellent liquidity and solid financial performance. These factors are tempered by gross leverage that – while modest – has been rising over time. The company's liquidity is strong, with solid and predictable cash flow, large cash balances and $7.5 billion in committed bank facilities. While PepsiCo's scale, diversity and strong franchises help to offset some leverage creep, we expect that debt to EBITDA will remain slightly above 3 times over the next 12-18 months. PepsiCo faces challenges to grow its volume in mature carbonated soft drink (CSD) markets. But this weakness is partially offset by its strong innovation program and productivity initiatives. It is also helped by good growth prospects in food and beverage internationally, and in its Frito-Lay North American snacks segment.

Exhibit 1

Gross Leverage at High End of Range for Rating

2.4x 2.4x

2.8x

3.0x

3.2x 3.2x 3.2x

1.7x 1.7x

1.9x 1.8x 1.8x

1.6x 1.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

FYE 2013 FYE 2014 FYE 2015 FYE 2016 FYE 2017P FYE 2018P FYE 2019P

Debt / EBITDA Possible Downgrade Net Debt / EBITDA

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Source: Moody's Financial Metrics™

MOODY'S INVESTORS SERVICE CORPORATES

Credit Strengths

» World leader in convenience foods; strong soft beverage positions

» Excellent liquidity; strong cash flows

» Good product diversification

» Restructuring program savings

Credit Challenges

» Gross leverage will remain somewhat high for the rating

» Some degree of customer and geographic concentration

» Declining CSD volume in mature markets; slow growth in some emerging markets

Rating Outlook The stable rating outlook reflects our expectation that PepsiCo will continue to generate solid cash flow, sustain healthy liquidity, and maintain debt to EBITDA around 3 times over the next twelve to eighteen months.

Factors that Could Lead to an Upgrade

» Good growth momentum in North American beverage business,

» Solid operating performance,

» Company expresses a commitment to maintain debt/EBITDA below 2.5 times, and

» Retained cash flow to net debt approaches 30%

Factors that Could Lead to a Downgrade

» Operational difficulties

» Debt/EBITDA sustained above 3 times

» Retained cash flow to net debt approaches 20%

» EBITA margins fall below 16%

» The company pursues large debt financed shareholder returns or acquisitions

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

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Key Indicators

Exhibit 2

Key Indicators

KEY INDICATORS [1]

PepsiCo, Inc.

12-18 Month Fwd. View 3/25/2017(L) 12/31/2016 12/26/2015 12/27/2014 12/28/2013

Revenue (USD Billion) $63.0 $63.0 $62.8 $63.1 $66.7 $66.4

EBITA Margin 18.0% 17.2% 17.3% 16.2% 15.9% 15.6%

RCF / Net Debt 29.0% 23.3% 24.7% 25.9% 27.9% 26.9%

EBIT / Interest Expense 8.1x 8.6x 8.7x 9.3x 10.3x 9.6x

Debt / EBITDA 3.2x 3.1x 3.0x 2.8x 2.4x 2.4x

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Source: Moody's Financial Metrics™

Detailed Rating Considerations WORLD LEADER IN CONVENIENCE FOODS AND SOFT BEVERAGES

With LTM March 2017 sales of approximately $63 billion, PepsiCo is number one worldwide in branded snacks, number one in sports drinks and non-carbonated beverages in the U.S. and number two in the U.S. carbonated soft drink industry. It is also among the leaders in various other categories of the U.S. food and beverage markets. The leadership position gives it better pricing flexibility than many other companies and raises its importance in negotiation with key customers and suppliers. PepsiCo is the global leader in savory snacks, such as potato chips and tortilla chips, and number two in soft beverages globally.

SUBSTANTIAL SCALE AND SUPERIOR INNOVATION CAPABILITY

We expect PepsiCo to continue benefitting from its considerable scale and product diversification. The company's revenues are earned across six reportable segments and multiple markets. Nearly half of overall sales are derived internationally in over 200 countries and territories, many of which have higher growth than its home market. We expect broadly faster growth in emerging markets than its more stable developed markets.

Carbonated soft drinks represent a large share of PepsiCo's beverage business, but less than 25% of total revenues. CSDs have experienced declining consumption in the U.S. and some other mature markets as consumers move to healthier and more natural alternatives. To promote its beverage volume growth in North America, PepsiCo will continue to focus on innovation, continued brand building, expanding its presence in fountain accounts and investing in its non-carbonated beverage business, which has good growth potential. As an example of recent innovation, in May 2017 PepsiCo announced a global launch of Lemon Lemon, a new line of sparkling lemonades that contain no artificial flavors and are sweetened with a blend of sugar and stevia leaf extract. The Lemon Lemon product is on-trend with more natural, lower calorie beverages.

PepsiCo will benefit from smaller strategic investments it has made in companies positioned in fast growing segments to complement its innovation and brand building. Most recently, in the fourth quarter of fiscal 2016 PepsiCo acquired Kevita, a leader in fermented probiotic beverages. We expect PepsiCo will continue to make smaller bolt-on acquisitions in the non-carbonated space to enhance its portfolio mix. We expect such bolt on acquisitions to have minimal impact on the company’s credit metrics due to PepsiCo’s large scale.

MODEST LEVERAGE, ALBEIT HIGH FOR THE A1 RATING CATEGORY

We expect PepsiCo's gross leverage to remain at the high end of the acceptable range for the rating in the year ahead. We expect debt to grow on a gross basis because of increased borrowing in the U.S. to fund U.S. corporate needs and shareholder distributions at home while earnings and cash grow internationally. As a result of acquisitions and shareholder friendly activity in the past several years, PepsiCo's debt/EBITDA increased to approximately 3.1 times at LTM March 2017 from 2.4 times at year end 2014 (calculated using Moody's standard adjustments). PepsiCo's net leverage remains more modest at around 1.9 times as of LTM March 2017 and we expect it to fall to 1.6 times over the next 12-18 months. A continued upward creep in gross or net leverage could pressure PepsiCo's ratings.

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MOODY'S INVESTORS SERVICE CORPORATES

The difference between gross and net leverage will increase as PepsiCo continues to build cash overseas. Most of PepsiCo's cash is domiciled internationally and would require tax payments to repatriate to the U.S. We estimate that the incremental tax rate to bring its foreign earnings home would range from 18%-25%. If there is tax law change, we expect that PepsiCo would take advantage of the opportunity to bring cash home at lower rates and would use a significant portion of it to reduce US debt, thus lowering gross (but not net) leverage.

RESTRUCTURING PROGRAM LIKELY TO OFFER SAVINGS

Achieving growth and improving profits should be manageable over the next year due to moderate commodity cost inflation. Headwinds, however, will include the ongoing decline of CSD consumption in North America, constantly evolving consumer preferences and stiff competition. We expect operating profit growth in the low-to-mid single-digit range. To offset some of these headwinds, PepsiCo announced in early 2014 a $5 billion, five year productivity plan and has taken out $1 billion per year since the program began. PepsiCo expects the program to cost a total $990 million pre-tax, of which $705 million will be cash expenditures. The company incurred $160 million in charges related to the restructuring initiative in 2016, $95 million of which was cash. In addition to the five billion productivity program, Pepsi initiated its own version of zero-based budgeting or `smart spending' in Q3 2015 which focuses on right sizing operating expenses without starving top-line growth.

GOOD PRODUCT DIVERSIFICATION WITH SOME CUSTOMER AND GEOGRAPHIC CONCENTRATION

We expect PepsiCo's geographic diversity to improve as its operations in emerging markets grow faster than at home. Although its products are sold in more than 200 markets, PepsiCo is not as geographically diversified as some of its competitors. It generates about 63% of its net revenues in the U.S. and Canada, both mature markets with declining CSD category trends. Nonetheless, PepsiCo's widespread and efficient distribution infrastructure provides it with opportunities to expand its geographic reach and international revenue base. The company has a clear strategy to further grow its international business. PepsiCo has announced significant capital investments in Brazil, India, Mexico, China and Russia in recent years. These are mostly related to its food divisions, further extending its presence in fast-growing and/or emerging markets.

We expect PepsiCo to retain solid relationships with retailers. Consolidation in the retail industry increases the bargaining power of PepsiCo's largest customers. PepsiCo's 2016 net revenues from Wal-Mart represented around 18% of its net sales in North America and 13% of total worldwide net sales. The company's top five retail customers represented around 32% of its 2016 North American net sales. But PepsiCo's powerful stable of high velocity food and beverage brands will continue to make it an important supplier to top retailers.

EVENT RISK

PepsiCo has attracted the interest of activist investors over the past few years, some of which have agitated for transformation at the company including possible sale of businesses. PepsiCo has publically indicated that it isn't interested in such proposals. PepsiCo's ratings do not incorporate the possibility of a large business transformation, and recent strong performance has been a good defense against such arguments. Regardless, we cannot rule out the possibility of change at the company either in its financial strategy or its business configuration or that it could become the target of other large consumer products companies.

Liquidity Analysis We expect PepsiCo to maintain a solid liquidity profile over the next 12 to 18 months. Its excellent liquidity is characterized by consistent operating cash flows, substantial cash, and high quality short term investments (totaling $16.0 billion as of 3/25/17). It also has committed bank facilities to support the issuance of short-term debt, including commercial paper and near-term bond maturities. We estimate that PepsiCo will generate about $2.5 billion of free cash flow (CFO less capex and dividends) over the next 12 months. It has $5.9 billion in debt maturities over the next 12 months which we expect it to refinance.

PepsiCo has a $3.75 billion five-year committed bank revolving credit facility expiring in June 2022. The facility has same day availability, contains no ongoing MAC language, and no financial covenants. Additionally, PepsiCo can borrow up to $3.75 billion under its 364-day unsecured revolving credit facility expiring June 2018 (which it renews annually). The 364-day revolver contains a one year term-out (at PepsiCo's option) and no financial covenants.

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MOODY'S INVESTORS SERVICE CORPORATES

We do not expect PepsiCo's peak CP borrowings to exceed committed back-up facilities. PepsiCo had $4.5 billion of commercial paper outstanding as of March 25, 2017. On an annual basis the company's cash flow provides ample funding to meet its working capital needs, upcoming maturities, capital expenditures and dividend payments. Working capital fluctuates each quarter with peak uses occurring in the first fiscal quarter due to the inventory buildup for summer months for beverage and certain snack food items.

Structural Considerations PepsiCo guarantees the legacy debt of its bottling subsidiaries and we expect no further debt issuance by these subs.

Corporate Profile PepsiCo, Inc. (”PepsiCo”), headquartered in Purchase, NY, is a world leader in snack foods and beverages. The company manufactures, markets, and sells a variety of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods. The company boasts 22 different product lines that each generate more than $1 billion in annual retail sales. These include Pepsi, Diet Pepsi, Mountain Dew, Aquafina, Tropicana, Cheetos, Ruffles, Doritos, Fritos, Gatorade, Quaker and many others. Revenue for the 12 months ended March 2017 was approximately $63 billion.

Rating Methodology and Scorecard Factors

Exhibit 3

Rating Factors

PepsiCo, Inc.

Soft Beverage Industry Grid [1][2] Current

LTM 3/25/2017

Moody's 12-18 Month

Forward View

As of 6/13/2017 [3] Factor 1 : SCALE (16%) Measure Score Measure Score

a) Revenue (USD Billion) $63.0 Aa $63 Aa

Factor 2 : BUSINESS PROFILE (40%)

a) Product Diversification Aa Aa Aa Aa

b) Geographic Characteristics Aa Aa Aa Aa

c) Market Position & Brand Strength Aa Aa Aa Aa

d) Innovation, Distribution & Infrastructure Aa Aa Aa Aa

e) Pricing Flexibility A A A A

Factor 3 : FINANCIAL POLICY (16%)

a) Financial Policy A A A A

Factor 4 : PROFITABILITY (7%)

a) EBITA Margin 17.2% A 18% A

Factor 5 : LEVERAGE & COVERAGE (21%)

a) RCF / Net Debt 23.3% Baa 29% Baa

b) EBIT / Interest Expense 8.6x A 8.1x A

c) Debt / EBITDA 3.1x Baa 3.2x Baa

Rating:

Indicated Rating from Grid Factor 1-5 A1 A1

Rating Lift

a) Indicated Rating from Grid A1 A1

b) Actual Rating Assigned A1

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] As of 3/25/2017(L). [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures. Source: Moody’s Financial Metrics™

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MOODY'S INVESTORS SERVICE CORPORATES

Ratings

Exhibit 4 Category Moody's Rating PEPSICO, INC.

Outlook Stable Senior Unsecured A1 Commercial Paper P-1

PEPSI BOTTLING GROUP, INC. (THE)

Outlook Stable Bkd Senior Unsecured A1

PEPSIAMERICAS, INC.

Outlook Stable Senior Unsecured A1

QUAKER OATS COMPANY

Outlook Stable Senior Unsecured A1

CONCENTRATE MANUFACTURING COMPANY OF IRELAND

Outlook Stable Bkd Commercial Paper P-1

HILLBROOK INSURANCE COMPANY, INC.

Outlook Stable Pref. Stock Baa2

Source: Moody's Investors Service

6 26 June 2017 PepsiCo, Inc.: Update to Discussion of Key Credit Factors

MOODY'S INVESTORS SERVICE CORPORATES

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REPORT NUMBER 1077775

7 26 June 2017 PepsiCo, Inc.: Update to Discussion of Key Credit Factors

MOODY'S INVESTORS SERVICE CORPORATES

Contacts

Linda Montag 212-553-1336 Senior Vice President [email protected]

Peter H. Abdill, CFA 212-553-4024 MD-Corporate Finance [email protected]

Brandon Bayer 212-553-2924 Associate Analyst [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

8 26 June 2017 PepsiCo, Inc.: Update to Discussion of Key Credit Factors