Fitch assigns A+ ratings to Brown-Forman's long-term issuer default rating, senior unsecured notes, bank credit facility; outlook stable
August 3, 2012
– Fitch Ratings has assigned the following initial ratings to Brown-Forman Corporation (Brown-Forman):
--Long-term Issuer Default rating (IDR) 'A+';
--Senior Unsecured Notes 'A+';
--Bank Credit facility 'A+';
--Short-term IDR 'F1';
--Commercial Paper 'F1'.
The Rating Outlook is Stable.
This rating action affects approximately $510 million of debt at April 31, 2012.
Brown-Forman's ratings reflect its low leverage and consistent and sizeable operating earnings and cash flow generation. The company's conservative financial strategy with regard to acquisitions and share repurchases, along with its strong brands and competitive position in the spirits industry, support its strong credit profile. Brown-Forman is one of the largest spirits companies in the U.S. and the seventh largest worldwide.
Brown-Forman's credit metrics as of the April 30, 2012 fiscal year end were strong for the rating category and the best of its Fitch rated peers. Total debt-to-operating EBITDA was 0.60x, operating EBITDA-to-gross interest expense was 27.3x and its funds flow from operations (FFO) adjusted leverage was 1.1x. Free cash flow (FCF - defined as cash flow from operations less capital expenditures and dividends) totaled $263 million for the year. Fitch expects credit statistics to remain near current levels in fiscal 2013.
Robust Cash Flow Generation
Brown-Forman cash flow from operations amounted to $516 million for the latest 12 months ended April 30, 2012. From FY 2008-2012, FCF averaged approximately $270 million annually. Although the company is in a deleveraging mode, Fitch does not expect continued debt reduction and believes the company's 2014 and 2016 maturing notes are likely to be refinanced.
Major contributors to Brown-Forman's operating earnings are its Jack Daniel's franchise, which is the fifth-largest premium spirits brand and the largest selling American whiskey brand in the world including its highly successful line extensions, and ready-to-drink beverages. Brown-Forman's other major brands are Finlandia Vodka, Southern Comfort Liqueur and El Jimador Tequila.
Consumption of alcoholic beverages is somewhat recession resistant. From 2007-2009, a period covering the latest U.S. recession, distilled spirits consumption declined by approximately 1%. Brown-Forman gained market share during this period with volume growth of 4% in 2008 and flat in 2009. Brown-Forman's spirits portfolio competes in the super premium to premium category and skews toward whiskeys, liqueurs and bourbons. Fitch views this as acompetitive strength because the aging process and inventory investments
required are a barrier to entry providing an impediment particularly for value competition. The company also has good geographic diversification with net sales contribution in FY 2012 of 42% from the United States (the world's most profitable spirits market), 27% from Europe and 31% from Rest of the World. In addition to the convenience factor, Brown-Forman's ready-to-drink and ready-to-pour products effectively diversify its product mix.
Debt Structure and Liquidity
All of the company's debt is senior and unsecured with approximately $250 million maturing in both 2014 and 2016. The company has an undrawn $800 million five-year credit facility, which can be expanded by $400 million and expires Nov. 18, 2016. The credit facility is primarily used to support the company's commercial paper program, in which there were no issuances at April 30, 2012. The credit facility includes an interest coverage financial maintenance covenant of 3.0x.
Industry risk factors and Brown-Forman's high concentration of earnings from its Jack Daniel's franchise, which represents approximately 51% of the depletions of the company's major brands, play the largest role in limiting the company's ratings to the 'A' category, making an upgrade unlikely. Fitch believes Brown-Forman will participate in industry consolidation or at a minimum make investments to further distribution in developing markets. The company's strategy to acquire brands that complement its portfolio and that have growth potential may result in an increase in leverage. Merger and acquisition risk from an unsolicited takeover is unlikely because the Brown family control of 69.3 % of the voting shares.
While not anticipated in the near term, with Brown-Forman's current credit profile there is ample headroom in the company's credit metrics to allow for a large bolt-on acquisition. Given Brown-Forman's low leverage and the consistency and strength of its cash flow Fitch would not anticipate that total debt-to-EBITDA (leverage) will exceed 1.5x (or 2.0x on a lease adjusted basis) even with up to $1 billion of incremental debt. Leverage exceeding those amounts will likely lead to a negative rating action.
Recent Operating and Financial Performance and Outlook
Benefiting from high single-digit depletion rates from its Jack Daniel's franchise and Finlandia, sales net of excise taxes increased 5.2% to $2.7 billion during FY 2012. Operating income excluding other expenses, which included one-time items, increased 1.0% to $788 million despite the negative effects of heightened advertising, selling, general and administrative expenses and unfavorable foreign exchange, and the sale of Hopland-based wine brands, for the period. As mention previously, FCF was $263 million, consistent with the company's five-year average. Excess FCF is expected to be used for acquisitions and share repurchases. Brown-Forman anticipates pricing in 2013 to result in mid-to-high single-digit growth in sales and operating income. Although the company has good geographic diversification, an economic slowdown or a recession in more than one major market may dampen top-line growth.
What Could Trigger a Rating Action
Future developments that may, individually or collectively, lead to a positive rating action include:
--An upgrade is unlikely given Brown-Forman's dependence on the Jack Daniel's franchise.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Larger than expected debt-financed acquisitions that result in total debt-to-operating EBITDA exceeding 1.5x or total adjusted debt-to-operating EBITDAR exceeding 2.0x could lead to a ratings downgrade;
--A significant and sustained loss of market share for the Jack Daniel's brand could also contribute to negative rating actions.