OREANDA-NEWS. August 31, 2015. Currency weakness in the key markets of Brazil and Russia as well as weak demand in the US and Western Europe is putting pressure on brewers Anheuser-Busch Inbev (ABI) and Carlsberg, Fitch Ratings says. We do not expect this to lead to rating actions in the near-term, due to our expectation of healthy free cash flow margins and a cautious approach to M&A, but if the negative trends continue into 2016 the brewers' ratings could be affected.

First-half results from the sector show weaker emerging market currencies contributed to a tougher trading environment by weighing on consumer spending and through a translational effect on profits. The decline of the Brazilian real was particularly significant for ABI, which based on our estimates generated 34% of its FY14 profits in Brazil. Rouble weakness hit Carlsberg, which generates around a quarter of its profits in Russia, down from 46% of group profits in 2010. While Carlsberg is reducing capacity to address weaker demand in Russia, a depreciating rouble will dent profits if not compensated by increasing prices or by further cost cuts.

Weak consumer spending and adverse weather in Western Europe added to a tough first half for Carlsberg, while the growth of craft beers in the US affected ABI. These trends also had an impact on the other two of the big four global brewers, SABMiller and Heineken. But this was mitigated by their greater exposure to African and Asian markets, which were the only bright spots in terms of growth during the period.

All the companies raised prices, but for ABI and Carlsberg this was not enough to compensate for the currency impact and shrinking organic sales volumes. We expect ABI's leverage at end-2015 to remain stretched for its A/Stable rating. Having completed a round of major M&A spending in 2014, the brewer stepped up shareholder returns in 2015 despite not having fully reduced leverage to a comfortable level for the rating.

Carlsberg's leverage is above the level we generally view as appropriate for its BBB/Stable rating, but we continue to expect 2015 cash flow generation will be enough to get leverage back down close to the 3.5x level. However, if Carlsberg's profitability does not improve from the weak first half and remains more volatile than the industry average, this could result in a negative rating action.

As a result of the difficult operating environment, ratings are increasingly reliant on brewers' ability to strengthen cash flow generation while maintaining conservative financial policies. For more information on the sector's first-half performance, see our "European-Based Brewers Results Dashboard 1H15" available at www.fitchratings.com.