Fitch Ratings assigns BBB rating to Molson Coors Brewing's long-term issuer default, bank credit facility, senior unsecured debt ratings; outlook stable

Nevin Barich

NEW YORK , April 3, 2012 (press release) – Fitch Ratings has assigned the following initial ratings to Molson Coors Brewing Company (Molson Coors) and related entities after the firm's announcement that it has signed a definitive agreement to acquire StarBev for $3.5 billion.

Molson Coors Brewing Company (Parent)

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

--Short-term IDR of 'F2';

--Bank credit facility rating of 'BBB';

--Senior unsecured debt rating of 'BBB'.

Molson Coors International LP (a 100% owned subsidiary of Molson Coors)

--Long-term IDR of 'BBB';

--Senior unsecured debt rating of 'BBB'.

Coors Brewing Company (a 100% owned subsidiary of Molson Coors)

--Long-term IDR of 'BBB';

--Senior unsecured debt rating of 'BBB'.

Fitch expects to rate the company's new bank debt 'BBB' which will be comprised of a revolver and a U.S. term loan and a Euro term loan and 'BBB' to the company's senior unsecured convertible notes. Fitch expects Molson Coors' new debt to rank equally to existing debt and will be guaranteed fully and unconditionally, jointly and severally by all material subsidiaries.

The Rating Outlook is Stable.

Molson Coors has received committed financing and is expected to fund the $3.5 billion acquisition with a combination of bank debt, convertible notes and cash on hand. The company's pro forma leverage total debt to EBITDA, including dividends from the MillerCoor joint venture (JV) is expected to be approximately 3.5 times (x), which is high for the rating category. However, free cash flow (FCF), calculated by Fitch as cash flow from operations (CFFO) less capital expenditures and dividends, for the combined entity is estimated in excess of
$600 million annually and is expected to be used for debt reduction in the near term.

StarBev had revenues of approximately $1 billion and recurring EBITDA of $322 million for the year ended Dec. 31, 2011. Molson Coors expects the acquisition to be accretive and that pre-tax operational synergies will grow to $50 million annual by 2015. The purchase price multiple is 11.0x. The transaction is subject to the approval of certain European regulatory authorities and the company anticipates the closing within the second quarter of 2012.

The acquisition bolsters the company's international business by adding premium brands in the Central and Eastern European Region and in contiguous regions such as Russia and the Ukraine. In addition to the geographic diversification, the StarBev acquisition also provides a platform for Molson Coors to expand its other brands in territories with favorable consumption trends. Following the acquisition about 14% of the company's revenue will be generated from emerging markets mainly within continental Europe.

Molson Coors' ratings are supported by its strong market share positions in large profitable beer markets. The company has the second leading market share in the U.S. (through its MillerCoors LLC JV), Canada and the U.K. with 30%, 40%, and 19% share in the respective markets. Molson Coors brands are some of the most recognizable and valuable in the world and include Coors, Coors Light, Molson and Carling. In the U.S., Coors Light recently became the second best selling beer and Blue Moon is the largest craft beer brand. Molson Coors'
generates significant cash flow. CFFO for the year ended Dec. 31, 2011 was up 10.3% to $870 million. FCF was $404.6 million.

Molson Coors' ratings further reflect the multi-year declines in beer volumes in the major markets of the U.S., Canada and the U.K driven in part by shifting consumer preferences. There was modest improvement in the U.K. during 2011 due to the addition of the Modelo brands and the Sharp's brand. Wine and spirits consumption volume has continued to grow over the same time period. In line with trends of other large brewers, Molson Coors' sales to retailers (STRs) of beer in 2011 declined 2.3%, 1% and increased 1.6% in the U.S., Canada and the U.K., respectively. Craft brewers in the U.S. have largely bucked the volume declines and posted double digit volume increases, but the craft brewing segment is still relatively small compared to the overall beer market.

The company's ratings incorporate the consolidating nature of the global beer industry its maturity, particularly in highly developed markets. The demonstrated ability to reap efficiencies and synergies from scale has encouraged M&A activity. As a result, the beer industry is heavily consolidated on a global and local level. Many beer markets are structured as oligopolies or
quasi-monopolies, with high barriers to entry given the distribution networks that industry leaders have built over the years and the long-standing loyalty to locally branded products. While Molson Coors is smaller than its global peers, its family control makes it a difficult target.

A positive rating action is not anticipated in the near term as the company's credit measures are weak for the rating category. However, if Molson Coors delevers within a 18-24 month period as expected and effectively integrate StarBev operations, while maintaining its cash flow profile and is committed to maintaining leverage in the low 2.0x a positive rating would be considered. A negative rating action could result from a failure to reduce debt and leverage is maintained above 3.0x for an extended period. While not anticipated, pressure could also be placed on the ratings through a deterioration in the acquisition so that it absorbed significant managerial and financial resources; or sustained material declines in EBITDA due to volume and/or margin contraction, possibly due to heightened competition or large debt-financed share repurchases.

Molson Coors' funds from operations (FFO) adjusted leverage improved 2.1x for the year ended Dec. 31, 2011 from 2.5x for the year ended Dec. 31, 2010 as FFO benefited from the absence of a discretionary pension contribution that negatively impacted 2010 CFFO. Adjusted operating EBITDA to gross interest expense improved slightly to 10.5x. Although, large brewers are facing similar input cost inflation, Molson Coors and MillerCoors have been able to cut costs in order to sustain margins despite the pressures. However, Molson Coors'
margins are lower than its larger peers. Fitch expects Molson Coors to continue to cut costs to move margins closer to its peer group.

Including equity income from MillerCoors, Molson Coors total debt to adjusted operating EBITDA has been stable ranging between 1.7x-1.8x since year-end 2009. Fitch includes the equity income from MillerCoors within Fitch calculated credit measures since Molson Coors has a significant stake in the JV with 42% ownership and 50% voting control. Cash distributions from MillerCoors are regular and roughly equal Molson Coors' equity income in any period.

Molson Coors' has an undrawn $400 million revolving credit facility. The credit facility expires in April 2015 and contains a leverage covenant limiting total debt to consolidated EBITDA including Molson Coors' proportional share of MillerCoors' EBITDA to not exceed 3.5x. This facility is likely to be amended or replaced with the financing for StarBev. As mentioned previously, given Molson Coors' high FCF and generally conservative financial policies with regard to dividends and share repurchases, Fitch expects the company to delever quickly
and maintain sufficient liquidity.

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