OREANDA-NEWS. Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Constellation Brands Inc. (Constellation) and for CIH International S.a.r.l. at 'BB+'. Fitch has also withdrawn all ratings assigned to Constellation's previous credit facility and term loans and assigned new ratings to Constellation's amended $4.1 billion credit facility including the revolving facility, U.S. term loan A and European term loan A. The Rating Outlook is Stable. See the full list of ratings at the end of this press release.

Constellation has amended its credit facilities to increase the size of the revolver by $300 million to $1.15 billion and US Term Loan A by $200 million to $1.27 billion replacing the current US Term A and U.S. Term A-2. In addition, the company will be consolidating their European Term A and Term B into a new $1.43 billion European Term A. The amendment will also extend the maturities of the term loans to 2020 for the revolver, US Term A and European Term A, and 2021 for the US Term A-1. The amended agreement has substantially similar negative covenants with certain modifications including an increase in the dividend restricted payment carveout to $100 million per quarter.

KEY RATING DRIVERS

Hispanics, Premiumization Driving Growth
Fitch Ratings believes Constellation is well positioned to capture long-term growth due to its strong appeal to the Hispanic consumer coupled with the ongoing trend toward premiumization in the beer industry driven by Mexican imports and craft beer. Other growth factors include the expected sizeable increase in Hispanic consumers reaching the legal drinking age, growth in distribution, and expansion of drinking occasions due to increased draft and can consumption.

The $4.75 billion Modelo acquisition (an additional true-up payment of $543 million was made at the beginning of fiscal 2015) that closed in fiscal 2014, materially increased Constellation's diversity, scale and exposure to above-average market growth rates in the beer segment. For fiscal 2015, Constellation generated 60% of segment operating income from the beer business compared to approximately 40% in fiscal 2013, and grew beer depletion volumes by 8.3% which significantly outperformed the U.S. beer industry.

Comparatively, the overall U.S. beer industry increased in the low single digits for 2014 after generally experiencing low single-digit declines during the past several years due to share loss as the millennial generation shifted preferences into wine and spirits along with a recessionary macroeconomic environment. As premiumization continues to affect the beer market, consumers are trading up for high-quality, flavorful products in above-premium, super-premium categories including hard cider and flavored malt beverages, craft and import offerings. While several imported beer segments are experiencing declines, Mexican imports continue to grow and have been the primary imports growth driver during the past several years.
Thus, Fitch expects Constellation will generate increased cash flows driven by the above strong underlying fundamentals, further leverage of new product development innovation, and the potential for increased cost of goods sold efficiencies as the company brings expansion capacity on-line. Fitch's forecast assumes gross margin expansion of 40 basis points in fiscal 2016 and another 70 basis points in fiscal 2017

Leading Market Positions
Constellation's ratings consider the company's leading market positions and well-known liquor portfolio. According to the company, Constellation is the third-largest U.S. beer company with 50% volume share in the import segment due to its Mexican beer portfolio that contains five of the top 15 U.S. imported beers. Constellation is also one of the world's largest wine producers, is focused on growing premium brands, and is the producer of one of the fastest-growing premium brand vodkas, Svedka.

Constellation will need to continue to focus on improving wine growth as the company's performance declined in fiscal 2015. The wine portfolio lagged the overall U.S. category causing wine dollar market share to erode slightly, driven by competition in the super-premium price segment. Fitch's forecast assumes modest growth in wine revenue for fiscal 2016 after a 1.2% decline in fiscal 2015. The luxury/ super luxury wine segments have witnessed strong volume and dollar sales growth since 2010 as consumers continue to trade up to wine priced $20 and above.

Constellation's $315 million acquisition of luxury wine brand Meomi highlights the company's focus on improving the price mix in the wine portfolio. According to the company, Meomi is the No. 1 luxury/super luxury Pinot Noir, generating revenue of $65 million during 2014 by selling over 600,000 cases. The acquisition will be funded by a mix of cash on hand and incremental term borrowings under the amended credit agreement.

CFO Growing, FCF Weak
Fitch expects Constellation to generate increased cash flow from operations (CFO) driven by strong underlying fundamentals, further leverage of new product innovation, and increased efficiencies as expansion capacity comes online. Free cash flow (FCF) is pressured in fiscal 2016 due to peak capital spending and new dividend, before rebounding in fiscal 2017.

The company expects capital expenditures for FY2016 will be in the range of $1.05 billion to $1.15 billion, with capital expenditures related to the Nava brewery expansion in the range of $950 million to $1.05 billion. Fitch believes that FCF margins will remain in the low single digits in FY2017, before improving to mid-single digits in FY2018 as capital expenditures related to the expansion project begin to taper off.

Leverage High, Improvement Expected
While total debt levels increased in fiscal 2015 due to sizeable new capital investment initiatives and the glass-plant acquisition, leverage still improved modestly. The substantial investments reflect stronger underlying growth in revenue, profitability and cash flows than previously anticipated. Leverage (total debt/EBITDA) was 4.1x at year-end fiscal 2015, which is modestly high for the ratings. However, Constellation is on track to further reduce leverage through EBITDA growth to the upper 3x range during fiscal 2016.

KEY ASSUMPTIONS
Additional key assumptions within Fitch's fiscal 2016 rating case for the issuer include:
--Consolidated revenue growth of 6.5% supported by shipment volume growth in the beer segment of approximately 8.5%;
--Gross margin improving 40 basis points to 44.2% in fiscal 2016 and another 70 basis points in fiscal 2017;
--Operating income margin improvement for the beer segment of approximately 100 basis points to 33%; slight decline in operating income margin in the wine and spirits segment to the high 23% range;
--Operating cash flow of $1.15 billion;
--FCF deficit of approximately $200 million with FCF improving in fiscal 2017 to approximately $140 million for an FCF margin of approximately 2%;
--Total debt to EBITDA leverage of 3.8x - 3.9x by the end of FY2016 with the potential for further improvement to the mid-3x range in FY2017 depending on capital allocation decisions.

RATING SENSITIVITIES
While a ratings upgrade is not anticipated over the next 12 months, future developments that may, individually or collectively, lead to a positive rating action include:

--Leverage such that total debt-to-operating EBITDA is under 3.5x or FFO adjusted leverage is under 4.5x on a sustained basis;
--Stable volume trends for their primary brands;
--Maintain EBIT margin in the mid-20% range and EBITDAR margin of at least 30%;
--Demonstrated ability to improve and sustain FCF margin above 3.5%.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Deterioration in volume trends leading to market share losses;
--Significant and ongoing deterioration in profitability due to competitive activity;
--Increased leverage such that total debt-to-operating EBITDA moves above the low 4x range or FFO adjusted leverage that moves above the low 5x range on a sustained basis.

LIQUIDITY
FCF (defined as cash from operations less capital spending less dividends) for the 12-month (LTM) period ending Feb. 28, 2015 was $362 million which was above Fitch's expectations of approximately $300 million. Fitch's FCF expectations in FY2016 are for a deficit of approximately $200 million due to the peak in brewery investment for the Nava brewery and the initiation of a dividend ($240 million in fiscal 2016). In FY2017, Fitch expects FCF of at least $140 million as expansion capital spending ramps down.

The company had a cash position of $110 million as of Feb. 28, 2015. Under the amended credit agreement, Constellation will have full availability under its $1.15 billion senior secured revolving credit facility that matures in 2020. Constellation also has two accounts receivable securitization facilities that provide additional borrowing capacity from $190 million up to $290 million and from $100 million up to $160 million structured to account for the seasonality of the company's business. Availability on the facilities was $275 million and $100 million, respectively, as of Feb. 28, 2015.

Upcoming debt maturities in fiscal 2017 include $700 million of 7.25% notes. Annual amortization requirements for the new term loans over the next three fiscal years is approximately $117 million in FY2016, $138 million in FY2017 and $138 million in FY2018.

Constellation's profitability metrics are strong and relatively consistent, reflective of an investment grade profile. Metrics include FFO margin, EBIT, EBITDAR, FCF margin and profit volatility, although FCF is under substantial pressure in fiscal 2016 before rebounding in fiscal 2017. Constellation estimates operating margins within the beer segment will increase to the mid-30% range from 31.9% for fiscal 2015 as production is consolidated to the more efficient Nava brewery beginning at the end of 2015 and continuing through mid-2016. Fitch believes this margin expansion opportunity is reasonable although timing could vary depending on execution. Constellation will leverage natural freight cost opportunities and the decrease in sourcing from non-owned breweries to better enable the operating leverage inherent within its fixed-cost structure.

FULL LIST OF RATING ACTIONS

The following ratings were affirmed:

Constellation Brands, Inc.
--Long-term IDR at 'BB+';
--Senior unsecured notes at 'BB+/RR4'.

CIH International S.a.r.l.
--Long-term IDR at 'BB+'.

The following ratings were assigned:

Constellation
--$1,150 million senior secured revolver at 'BBB-/RR2';
--$1,271.6 million senior secured term loan A at 'BBB-/RR2';
--$241.9 million senior secured term loan A-1 at 'BBB-/RR2'.

CIH International S.a.r.l
--$1,430.1 million European term loan A at BBB-/RR1.

The following ratings were withdrawn:

Constellation
--$850 million senior secured revolver facility to 'BBB-/RR2';
--$477 million senior secured term loan A to 'BBB-/RR2';
--$243 million senior secured term loan A-1 to 'BBB-/RR2';
--$624 million senior secured term loan A-2 to 'BBB-/RR2'.

CIH International S.a.r.l.
--$463 million European senior secured term loan A at 'BBB-/RR1';
--$985.1 million European senior secured term loan B at 'BBB-/RR1'.