Standard & Poor's raises long-term corporate credit and issue ratings on Foster's Group to BBB+ from BBB, says company's stand-alone credit quality has modestly improved following takeover by SABMiller

Nevin Barich

NEW YORK , April 5, 2012 (press release) – Overview

-- In December 2011, Australian brewer and distributor Foster's Group Ltd. (Foster's) was acquired by global brewer SABMiller PLC.

-- In our view, SABMiller has a strong economic incentive to support Foster's and we consider that Foster's stand-alone credit quality has modestly improved following the takeover. This supports an equalization of our ratings on Foster's with those on SABMiller.

-- We are therefore raising our long-term corporate credit and issue ratings on Foster's to 'BBB+' from 'BBB' and removing them from CreditWatch positive.

-- The stable outlook on Foster's reflects that on its 100% owner, SABMiller.

Rating Action

On April 5, 2012, Standard & Poor's Ratings Services raised its long-term corporate credit and issue ratings on Australian brewer and distributor Foster's Group Ltd. (Foster's) to 'BBB+' from 'BBB'. At the same time, we removed the ratings from CreditWatch, where they were placed with positive implications on Sept. 21, 2011. In addition, we affirmed our 'A-2' short-term
rating on Foster's. The outlook is stable.

Rationale

The upgrade follows the acquisition of Foster's by global brewer SABMiller PLC (BBB+/Stable/A-2). The upgrade is the result of us equalizing our ratings on Foster's with those on SABMiller to reflect our view of SABMiller's strong economic incentive to support Foster's, as well as the benefits that we believe SABMiller's ownership will have for Foster's stand-alone credit profile (SACP).

In our view, SABMiller has a strong economic incentive to support Foster's because any material default by Foster's is likely to trigger a default of the rest of SABMiller's debt facilities. We base this assumption on our understanding that Foster's will be defined as a Principal Subsidiary under SABMiller's debt facilities. Furthermore, we consider that the size of the Foster's acquisition--which represents 15%-20% of SABMiller's consolidated EBITDA--and the degree of integration between the two companies also support our decision to equalize the ratings.

Our view that Foster's SACP will benefit from SABMiller's ownership primarily reflects our opinion that Foster's will manage its leverage in a manner consistent with an "intermediate" financial risk profile. We also believe that Foster's will benefit from the strong position of SABMiller's brands, which should more than offset the loss of third-party brands following the takeover. In addition, Foster's will benefit from access to SABMiller's supply chain and marketing and development capabilities.

The ratings on Foster's reflect our opinion of the high likelihood of support from its 100% owner, SABMiller. The ratings also reflect Foster's "strong" stand-alone business risk profile, which is underpinned by the group's strong position in the Australian brewing market, its diverse brand portfolio, high operating margins, and significant free cash flow generation. These factors
mitigate the risks associated with the growing market power of the major liquor retailers, regulatory risks (including taxation and marketing restrictions), and the ongoing fragmentation of brewing demand.

Liquidity

We assess Foster's liquidity as "adequate" under our criteria, reflecting our liquidity assessment on SABMiller.

SABMiller's 'A-2' short-term rating reflects our opinion that over the short term, the group should maintain ample internal liquidity, good cash flow characteristics, and significant access to the capital markets. SABMiller's sources of liquidity cover its uses by more than 1.2x. We estimate that SABMiller's liquidity sources over the next 12 months consist of:

-- A cash balance of $953 million at the end of September 2011;

-- An undrawn $2.5 billion committed credit facility maturing in 2016 and carrying the option of two one-year extensions; and

-- Funds from operations of about $4.5 billion.

We estimate that SABMiller's liquidity uses over the next 12 months consist of:

-- Short-term debt of $1.1 billion at the end of September 2011;

-- Capital expenditures of about $1.7 billion; and

-- Dividend payments of about $1.5 billion.

In addition, we consider that the following factors support SABMiller's "adequate" liquidity profile:

-- Good access to capital markets. In January 2012, SABMiller successfully refinanced $7 billion of the bank debt it assumed to acquire Foster's in the U.S. bond market. This was across 2015, 2017, 2022, and 2042 maturity bonds, which priced at 150 basis points, 165 basis points, 185 basis points, and 200 basis points yield spread to the benchmark treasury, respectively.

-- The bank facilities' single covenant, under which SABMiller operates with significant headroom.

-- The absence of downward rating triggers that would accelerate the maturity of a material amount of debt.

Outlook

The stable outlook on Foster's reflects that on its 100% owner, SABMiller. The equalization of the ratings on Foster's with those on SABMiller means that they will move in tandem from now on.

Upward rating pressure would therefore depend on us upgrading SABMiller.

Downward rating pressure could arise if the rating on SABMiller came under pressure and/or if we considered there to be a reduced likelihood of parental support from SABMiller at a time of a material deterioration in Foster's SACP. Such deterioration could follow a material decline in Foster's market position, including its revenue share of the Australian brewing market falling to materially less than 45% on a sustained basis.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011

-- Corporate Criteria--Parent/Subsidiary Links; General Principles;

Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004

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