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Fitch Rates Constellation's $800MM Issuance 'BB+'; Outlook Stable [Manufacturing Close - Up](Manufacturing Close - Up Via Acquire Media NewsEdge) The following is from Fitch Ratings on October 20: Fitch Ratings has assigned a 'BB+' rating to Constellation Brands Inc. (Constellation) $800 million dual-tranche senior notes due 2019 and 2024. The Rating Outlook is Stable. Constellation expects to use the net proceeds for general corporate purposes, including the repayment of indebtedness. Constellation has $500 million of 8.375 percent notes maturing in December 2014. KEY RATING DRIVERS Leverage Impact from Investment Relatively Neutral; Long-term Improvement Expected Fitch believes that while total debt levels are expected to increase and the free cash flow (FCF) outlook has decreased in the near term due to recently announced strategic initiatives, leverage expectations should remain relatively neutral. Moreover, Fitch expects Constellation to remain on-track to restore leverage back under 4x during fiscal 2016 as the substantial investments in the beer segment reflect stronger underlying growth in revenues, profitability and cash flows than previously expected. Pro forma for the offering, total debt-to-EBITDA for Aug. 31, was approximately 4.4x. Leverage, while improved from the close of the Modelo acquisition, remains outside of current expectations for the 'BB+' rating category. The post-closing adjustment payment of approximately $558 million due in June 2014, the high capital investment required for the brewery expansion and the glass sourcing investment strategy limits any meaningful debt reduction through fiscal 2016. Consequently, cash flow growth is expected to drive further leverage improvement to below 4x during fiscal year (FY) 2016. Lease adjusted funds from operations (FFO) gross leverage was approximately 5.1x as of Aug. 31, which is consistent with the 'BB' category for an alcoholic beverage company. Fitch expects FFO adjusted leverage will improve moderately over the forecast. Good Market Position and Diversification The ratings recognize Constellation's strong position in the premium beer, wine and spirits business that supports its sizable and stable cash generation. Fitch expects Constellation will produce increasing levels of cash from operations driven principally by expectations for favorable industry demand trends, further leverage on new product development, and the potential for increased efficiencies through cost synergies. Constellation is one of the foremost leading producers of premium wine and spirits. The company sold approximately 32 million cases during the first half of FY2015 with leading market share positions in the U.S., Canada and New Zealand. Constellation markets multiple wine brands across all categories and at several price points. Its well-known wine brands include; Robert Mondavi Brands, Clos du Bois, Estancia, Black Box, Arbor Mist, Blackstone, Rex Goliath, Simi, Toasted Head, Mark West, Ravenswood, Franciscan Estate, Ruffino, Wild Horse, Kim Crawford, Mount Veeder, Nobilo and Inniskillin. These focus brands represent the majority of U.S profitability. Premium spirit brands in its portfolio include SVEDKA Vodka, and Black Velvet Canadian Whisky all of which, according to the company, have a leading position in their respective categories. In the U.S., Constellation sells 14 of the top-selling 100 table wine brands. Constellation has a perpetual, exclusive license to import, market and sell primarily Grupo Modelo's Mexican beer portfolio in the 50 states of the U.S., the District of Columbia and Guam. According to the company, Constellation is the largest imported beer company in the U.S. and the third largest beer company overall with a beer portfolio that contains five of the top 15 imported beers. Corona Extra is the best-selling imported beer with more than 100 million cases sold, significantly higher than the nearest import competitor, Heineken. Corona Light is the leading imported light beer with almost 14 million cases sold. The Modelo acquisition also substantially increased the diversification of Constellation revenues and cash flows. Constellation generates approximately 55 percent of revenues and more than 60 percent of segment operating income from the beer business. Constellation should benefit from the current marketing momentum in the beer segment, the expected favorable growth of imported beer sales in the U.S., and the strength of the Corona brand. As such, Fitch anticipates the beer segment mix to grow during the next several years as Constellation increases earnings and cash flow over the longer term. Solid Liquidity and Profitability Underpin Financial Profile Constellation's liquidity was approximately $835 million as of Aug. 31. The company had a cash position of $104 million and approximately $726 million of availability under its $850 million revolving five-year secured credit facility that matures in 2018. Constellation has two accounts receivable securitization facilities that provide additional borrowing capacity from $190 million up to $290 million and from $100 million up to $160 million. Constellation had availability on the facilities of $270 million and $154 million respectively as of Aug. 31. FCF for the latest 12 month (LTM) period ending Aug 31, was $520 million. Constellation's reduced FCF expectation for fiscal 2015 to the range of $275 million - $350 million, which is reasonable and achievable. FCF expectations in FY2016 are more modest, which Fitch estimates at less than $100 million and consider the increased brewery investment in FY2016 to FY2018 from approximately $800 million to $1 billion. Upcoming debt maturities in fiscal 2015 include $500 million of 8.375 percent notes due in December 2014 and $700 million of 7.25 percent notes in FY2017. Annual amortization requirements for the next three fiscal years are approximately $24 million remaining in FY2015, $139 million in FY2016 and $182 million in FY2017. Constellation's profitability metrics are strong for the ratings and consistent with an investment grade profile for FFO margin, EBIT, EBITDAR, FCF margin and profit volatility. FCF margin is expected to weaken considerably in FY2015 before rebounding as peak investment levels decrease in the beer segment. Constellation estimates operating margins within the beer segment in the mid 30s range with FCF of greater than $1 billion in FY2018. Flexible Covenants The covenants and guarantors of the notes are the same as existing senior notes due 2021, 2022 and 2023. The senior notes are pari passu with existing and future senior unsecured indebtedness of Constellation. Constellation has material flexibility under its financial covenants for the credit facility. The maximum total leverage covenant is 5.5x. The minimum interest coverage covenant is 2.50x. Minimal restrictions exist for the issuance of incremental debt, and restricted payments are generally allowed if leverage as defined by the facility is equal to or less than 4.5x. Mandatory prepayments include amortization payments on the term loans and proceeds from material assets sales unless reinvested within a pre-specified time period. Solid Operating Performance For the first half of FY2015, Constellation generated $3.1 billion of net sales with results driven by a 12 percent increase in net sales from the beer segment. Beer shipment volume grew 8.8 percent for the first half to 111.5 million cases. Organic shipment volumes for the wine and spirits segment decreased modestly by 1.2 percent to 31.9 million cases due primarily to lower wine volumes in the U.S., largely from a planned reduction in inventory levels by one of Constellation's exclusive distributors. Brand building efforts and innovation across Constellation's beer portfolio allowed the company to take share and grow at above market rates. The company expects sales growth in the mid to high single digit range for the beer business and sales growth in the low to mid-single digit range for the wine and spirits category during fiscal 2015. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to a positive rating action include: --Given the current increase in leverage as a result of the Modelo acquisition, an upgrade of Constellation's ratings is not anticipated over the rating horizon. Constellation's track record of deleveraging following acquisitions and current commitment to reducing leverage back below 4.0x during fiscal 2016 was a key rating factor at the time the acquisition closed. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --Expectations that Constellation will sustain leverage above 4.5x following a material debt-financed acquisition. --Management allocating FCF for other strategic equity-friendly initiatives before reducing leverage back to the low 4x range, which is more in line with expectations for the 'BB+' rating category. --Sustained FFO fixed charge coverage of less than 3.5x. --Significant and ongoing deterioration in profitability that adversely affects operating results due to competitive activity. Fitch currently rates Constellation as follows: Constellation Brands, Inc. (Parent) --Long-term Issuer Default Rating (IDR) at 'BB+'; --Senior unsecured notes at 'BB+'; --$850 million senior secured revolver facility at 'BB+'; --$496 million senior secured term loan A at 'BB+'; --$245 million senior secured term loan A-1 at 'BB+'; --$650 million senior secured term loan A-2 at 'BB+. CIH International S.a.r.l. (Wholly Owned Subsidiary) --Long-term IDR at 'BB+'. --$481 million European senior secured term loan A at 'BB+'; --$990 million European senior secured term loan B at 'BB+'. Additional information is available at 'fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (May,). Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=749393 Additional Disclosure Solicitation Status http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=902134 ((Comments on this story may be sent to [email protected])) (c) 2014 ProQuest Information and Learning Company; All Rights Reserved. |