Fitch Ratings upgrades Constellation Brands' long-term issuer default, secured bank credit facility, senior unsecured notes ratings to BB+ from BB, citing company's free cash flow, reduced debt levels, internally funded share repurchases
April 19, 2012
– Fitch Ratings has upgraded the Issuer Default Rating (IDR) and debt ratings for Constellation Brands, Inc. (STZ) as follows:
Constellation Brands, Inc.
--Long-term IDR upgraded to 'BB+' from 'BB';
--Secured bank credit facility upgraded to 'BB+' from 'BB';
--Senior unsecured notes upgraded to 'BB+' from 'BB'.
The Rating Outlook is revised to Stable. This rating action affects approximately $3.1 billion of debt at Feb. 29, 2012. Additionally, Fitch has assigned a 'BB+' rating to the $600 million 6% notes due 2022 recently issued by STZ.
The upgrade reflects STZ's significant free cash flow (FCF), reduced debt levels and largely internally funded share repurchases. STZ's ratings and outlook reflect the company's leading global market positions and well-known portfolio of wine, spirits and beer brands. The ratings balance the general stability of the company's operations, good operating margins and consistent free cash flow generation with its acquisitive nature and leverage, which has been declining.
Fitch does not anticipate further upgrades to STZ's ratings at this point. Management would have to commit to and achieve investment grade metrics. Negative rating actions are possible if a significant and ongoing deterioration in operating results occur or the company engages in large debt financed acquisitions and/or share repurchases. A downgrade could also occur if Grupo Modelo (Modelo) unexpectedly terminates the Crown Imports JV and STZ fails to materially reduce debt during the three year termination period.
The company generates a substantial amount of FCF as evidenced by its averaging over $450 million in FCF annually the past five years. Fitch believes STZ's expectation of producing between $425 million and $475 million in FCF in fiscal 2013 is very achievable. STZ has used a combination of FCF and divestitures to reduce debt to $3.1 billion from a peak of almost $5.3 billion at May 31, 2008. While Fitch does not anticipate further debt reduction, current debt levels are consistent with a 'BB+' rating given current operating earnings.
STZ share repurchase program is expected to be largely funded by FCF. STZ recently announced a $1 billion share repurchase program that will be completed over the next two years. The program will commence after STZ completes its previous $500 million program under which the company had $86 million remaining at fiscal 2012 year end. Given STZ's share repurchase plans and expected FCF, Fitch sees debt levels flat to growing very modestly.
STZ's North American shipment volume decreased 0.8% for the fiscal year ended Feb. 29, 2012 due to an overlap of the 2011 distributor inventory build as part of the company's U.S. distributor consolidation. Fitch anticipates wine category growth in calendar 2012 will be in the low single digits and expects STZ's volume growth to be in line with industry. Crown Imports had a good year with its depletions growing mid-single digits and domestic category depletion continuing to decline in the low single digits. Fitch forecasts 2012 U.S. beer category growth will be flat to down low single digits and expects Crown Imports volume to grow in the low single digits. Fitch believes this will translate into modest operating income growth and stable credit metrics.
Credit measures for STZ are within Fitch's expectations. For the period ended Feb. 29, 2012, total debt to operating EBITDA plus equity income was 3.4 times (x), flat compared to the prior period. STZ has a stated leverage target range of 3x to 4x. Fitch includes the equity income from STZ's interest in the Crown Imports LLC JV in its leverage calculation since cash distributions are roughly equivalent and STZ exercises a considerable amount of control of Crown Imports LLC. Fitch estimates Funds Flow from Operations (FFO) Adjusted Leverage was 3.1x at Feb. 29, 2012, down from 4.0x, due in part to the favorable tax treatment from the sale of Australian and UK wine business. Operating EBITDA plus Equity Income to Interest Expense was 5.1x at Feb. 29, 2012, up from 4.8x for fiscal 2011.
STZ's liquidity remains adequate. As of Nov. 30, 2011, the company had a liquidity position of $446.6 million including $390.8 million of availability under its revolving credit facility and $55.8 million of cash and equivalents. At Feb. 29, 2012, the company had $85.8 million of cash and equivalents. The company is facing substantially higher, but manageable maturities in fiscal 2013, 2014, and 2015 of $314.1 million, $314.1 million, and $599.7 million respectively. The company has largely addressed the next two years of maturities which are term loan payments with its $600 million issuance of senior unsecured notes.
Modelo has the right to terminate the Crown Imports JV and import Modelo brands on its own starting in 2017 if Modelo informs STZ of its intent to terminate by the end of 2013. Otherwise the Crown Imports JV automatically renews for 10 more years. If Modelo terminates and utilizes another importer, STZ is entitled to 8x one year's EBIT of STZ's share of Crown Imports JV. Fitch does not expect Modelo to terminate the Crown Imports JV given the Modelo brands' strong performance. If Modelo does terminate the JV, Fitch expects STZ to be able to reduce debt with the three years of EBIT plus the potential 8x STZ's share of one year of Crown Imports JV's EBIT.
Fitch believes the security of the credit facility, being equity in subsidiaries rather than hard assets, is relatively weak and therefore has chosen not to distinguish between the secured credit facility rating and the senior unsecured notes rating at the 'BB' level. STZ's capital structure does not provide an advantage structurally to any one issue. STZ is the issuer of all the company's notes outstanding and the borrower under its credit agreements for its facilities.