Molson Coors Brewing Co. and Molson Coors International LP‘s long-term debt ratings were downgraded to “BBB-” from “BBB,” a move that puts the debt perilously close to being rating non-investment grade, or “junk.” Short-term ratings were also cut, to F3 from F2.
The downgrade by Fitch Ratings is a result of Molson Coors’ use of debt to acquire the 52% stake in MillerCoors that it doesn’t currently own.
Fitch said the “BBB-” rating reflects Fitch’s confidence regarding Molson Coors’ commitment and expected de-leveraging path during the next three years after transaction close.
On a pro forma basis, Fitch said it expects leverage (total debt to EBITDA) in excess of 5x. This compares to Molson Coors leverage of approximately 2.5x (total debt-to-operating EBITDA plus latest 12 months [LTM] equity income) for 2015.
Assuming a second half of 2016 close, Fitch expects Molson Coors’ leverage to improve to the low-4x range by the end of 2018 and the mid-3x range by 2019 driven largely by debt repayment combined with EBITDA growth in the low-to-mid single digits.
Molson Coors has committed to use its free cash flow (FCF) for debt reduction, with plans to discontinue share repurchases while maintaining the current dividend per share of $1.64. Projected FCF of $900 million to $1 billion in 2017 and 2018 is supported by substantial annual cash tax benefits in excess of $250 million, expected working capital benefits and synergies.
Molson Coors has a good track record of meeting deleveraging expectations following significant acquisitions, Fitch said, adding that the deleveraging following the 2012 StarBev transaction was ahead of Fitch’s expectations, thus demonstrating a strong commitment for a disciplined financial policy.
The low execution risk with this transaction due to familiarity with the MillerCoors joint venture and the good history on executing cost savings initiatives at both MillerCoors and Molson Coors that have exceeded past expectations should benefit cash generation.
Fitch was positive on the benefits the acquisition of Anheuser-Busch InBev‘s 52% stake in MillerCoors will have for Molson Coors. It noted that Molson Coors will be the No. 2 brewer in the U.S. with approximately 26% total market share including the number 2 and 4 beer brands and the No. 1 craft brand with Blue Moon.
In Canada, Molson Coors has the No. 2 and No. 4 brands – Coors Light and Molson Canadian – and the No. 1 brand in the U.K., Carling. In Central Europe, the company has top-three market share positions across the regions where Molson Coors operates including five number one positions.
The U.S. market will represent roughly two thirds of total pro forma revenue compared to 48% currently at standalone Molson Coors which will dampen the negative effects from foreign exchange headwinds. The transaction also enables an opportunity for global expansion through the Miller Brand portfolio that increases scale and ability to enter new markets.