OREANDA-NEWS. Fitch Ratings has assigned first time ratings to JB y Compania, S.A. de C.V. (JB) with an initial long-term foreign and local currency Issuer Default Ratings (IDRs) of 'BBB'. The Rating Outlook is Stable.

In addition, Fitch has assigned a 'BBB(EXP)' long-term rating to the company's proposed senior unsecured debt issuance of up to USD500 million with a 10-year bullet maturity. The proceeds from the issuance will be used mainly to refinance the company's existing indebtedness and related costs.

KEY RATING DRIVERS
JB's ratings reflect its solid operating profile backed by strong brand recognition of Jose Cuervo tequila, the integration across the supply chain for tequila production, as well as the relatively stable dynamics of the spirits industry, which is less subject to economic downturns. These factors have contributed to the group's strong free cash flow (FCF) generation and have resulted in a conservative capital structure with a sound liquidity profile. Negatively, the ratings are constrained by the significant product concentration in tequila which represents more than 70% of the overall sales volume, and the exposure to the volatility of prices of its main raw materials such as oil and sugar.

Leading Market Position; Strong Brand Recognition
JB boasts a strong market position driven by its flagship brand Jose Cuervo tequila, the No.1 tequila in the world by sales/volume. JB's subsidiaries grow, produce, bottle and sell Jose Cuervo brand tequila (among others). Jose Cuervo has the leading position in the U.S. premium segment with a 66% market share in terms of volume and a 29% market share in the rest of the world (excluding Mexico). JB is also the second largest distributor of spirits and liqueurs in Mexico in terms of volume and value after Diageo and Pernod. JB has the No.1 or No.2 position in every formal price segment in which it competes.

Conservative Capital Structure
Fitch expects leverage to approach 2.0x following the debt-funded acquisition of Bushmills Irish Whiskey (Bushmills) for USD404 million in February 2015. With the proposed issuance of USD500 million due in 2025, Fitch estimates JB's gross and net leverage to have reached 1.7x and 0.9x, respectively. These ratios are low for the rating category. With the incorporation of Bushmills these ratios should decline slightly to about 1.5x and 0.8x, respectively, in the next 18 to 24 months. JB's proposed bond will be the group's only debt and will be guaranteed by the majority of its subsidiaries.

Solid Operating Profile
Fitch believes that the sale of JB's equity stake in tequila Don Julio and early termination of the Smirnoff distribution agreement in Mexico will not have a significant impact on JB's profits as the consolidation of Bushmills is expected to have a net positive impact of 333,000 cases. Bushmills is the third most popular Irish whiskey worldwide in terms of volume and the second in the U.S. As of June 30, 2014, Bushmills sold 809 thousand nine-liter cases. A subsidiary of JB sold its 50% equity interest in Don Julio to Diageo in February 2015 as partial consideration for Bushmills. Don Julio had been a joint venture between the two companies since 2003. As part of the sale, both parties agreed to early terminate the distribution of Smirnoff in Mexico in November 2014. The net effect of these transactions was a payment to Diageo of USD404 million.

The group's operating profile is further supported by the return of the Jose Cuervo brand back to JB after the end of a distribution agreement with Diageo in June 2013; this led to an increase in sales and EBITDA in 2013 of 15% to USD715 million and 23% to USD198 million, respectively. As of Dec. 31, 2014, the group had sales of USD845 million and EBITDA of USD290 million. JB's EBITDA margin has steadily improved to 34% at YE 2014 from 26% in 2012.

Strong Liquidity and FCF Generation
JB's liquidity profile is strong as its USD226 million of cash and equivalents fully covered its total debt of USD68 million as of Dec. 31, 2014. The company's liquidity position is further supported by its strong FCF generation, which was USD128 million in 2014. Fitch expects JB to continue to report FCF margins in the mid-single digits for the next three years as a result of lower capex and stable dividend payments.

Product Concentration in Tequila
JB's high concentration of earnings from tequila which represents approximately 72% of sales volume as of Dec. 31, 2014, plays the largest role in limiting the company's ratings to the 'BBB' category. Tequila will represent about 68% of JB's total sales volume post-Bushmills consolidation, and whiskey will contribute 6%. Positively, the acquisition will provide opportunities to leverage both brands to strengthen the group's footprint. Bushmills' key markets are the U.S. and Canada (29% of revenue), Eastern Europe (23%), Western Europe (18%), and the U.K./Ireland (15%).

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--An exchange rate of MXN14.5/USD;
--EBITDA generation converging to the USD320 million/year level in the near/medium term;
--Capex of around USD33 million in 2015, with average capex of USD25 million per year for the next three years;
--Fixed dividend payments of USD65 million per year;
--Post-issuance, gross leverage slowly declining to 1.5x and net leverage to below 0.5x.

RATING SENSITIVITIES
The most likely cause of a downgrade would be a management decision toward a weaker capital structure. A sustained deterioration in performance or a large debt-financed acquisition that significantly increases net leverage to above 2.0x would also lead to a negative rating action. A positive rating action is not likely in the near- to medium-term.