Fitch Rates Molson Coors CAD900MM Issuance 'BBB'; Outlook Stable
The notes issued by Molson Coors International LP will rank equally with the company's other senior unsecured obligations as Molson Coors Brewing Company (Molson Coors) and certain subsidiaries will guarantee the senior notes on a senior unsecured basis. Net proceeds from the offering will be used for general corporate purposes including the refinancing of maturing debt. Molson Coors has CAD900 million of debt maturing in September 2015.
KEY RATING DRIVERS
Market Position
Molson Coors' ratings are supported by its well-known respected brands and strong-to-competitive market share positions in primarily large profitable mature beer markets. Molson Coors brands are some of the most recognizable and valuable in the world. Molson Coors has the second leading market share in the U.S. (through its MillerCoors LLC joint venture [JV]) with Coors Light and Miller Lite, respectively the No. 2 and No. 4 best-selling brands. In Canada, Molson Coors has the No. 2 and No. 3 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.
Molson Coors also has increasing exposure to the faster growing craft beer and above-premium portfolio in its developed markets. Molson Coors' craft segment, while still relatively small compared to their overall beer portfolio, is an important and growing offset to the declines experienced within its premium and value brands. Demand for mainstream lager beer in the U.S., despite the continuation of the economic recovery, has remained under pressure as the millennial generation shifts preferences into spirits and wine. The MillerCoors above-premium portfolio which includes Blue Moon, the largest craft beer brand in the U.S., was up slightly in the first half 2015 with growth slowing from the high single digits in 2014, a year that had benefitted from innovation roll-outs.
Molson Coors' market share gives the firm appropriate scale to better leverage fixed costs and take advantage of on-going cost efficiencies that provide substantial flexibility for brand reinvestment to bolster their competitive position, although profitability is less than peers. Molson Coors remains at a structural disadvantage in the U.S. relative to the greater scale of Anheuser Busch InBev NV/SA. The MillerCoors current JV ownership structure limits additional meaningful synergy opportunities in the areas of procurement, supply chain, distribution and back office.
Challenging Operating Environment:
Molson Coors' ratings further consider the difficult and soft global operating environment illustrated by slight declines in beer volumes in the company's key markets of the U.S., Canada and Europe. The volume declines are driven by competitive pressures including the shift in consumer preferences, lackluster economic conditions, termination of certain JVs, and weak consumer spending. Molson Coors' sales to retailers (STRs) of beer in the first six months of 2015 declined 3%, 6.3% and 3.5% in the U.S., Canada and Europe, respectively. Net sales per hectoliter increased 1.5% and 4% (local currency) respectively in U.S. and Canada during the six months ended June 30, 2015 driven by positive net pricing and mix. In Europe, net sales per hectoliter decreased in local currency by 1.6% for the first six months compared to a year ago, primarily driven by the loss of the Modelo brands in the U.K., lower contract brewing volume and negative mix, partially offset by positive pricing.
MillerCoors JV Performance
Equity income in MillerCoors increased 6.5% to \\$335 million during the first half of 2015 driven by lower brewing and packaging materials and fuel costs, as well as higher net pricing and supply chain savings. MillerCoors generated first half cost reductions of approximately \\$36 million along with an increase in domestic net revenue per barrel. The cost savings and price increases helped to offset the volume declines across MillerCoors' premium light, premium, and value portfolios. This included a low single-digit decrease in the largest segment in the U.S., premium light, for both Coors Light and Miller Lite portfolios although according to the company, MillerCoors gained share in the segment. Mid-single-declines affected the below premium portfolio due to reductions in national marketing investments and underperformance in certain brands.
The premium light segment has been negatively affected by unemployment rates for young, lower income men that have not been reemployed as the economy recovers. The lack of a long-term recovery for this key demographic segment is leading to headwinds as GDP, consumer sentiment and unemployment levels return to normalized levels. Overall, volumes in the U.S. beer industry have mostly declined the past several years. Growth in top-line revenue will focus on innovation, above-premium share and repositioned core brands.
Credit Metrics Weakening in 2015 before improving 2016
Fitch includes the equity income from MillerCoors within its calculated credit measures, since Molson Coors has a significant stake in the JV with 42% ownership and 50% voting control, and cash distributions from MillerCoors are regular and roughly equal Molson Coors' equity income in any period. For the end of the first half 2015 Molson Coors leverage (total debt-to-operating EBITDA plus LTM equity income of \\$584 million) was approximately 2.3x. EBITDA-to-interest was 9.9x. Fitch does not expect any further debt reduction as Molson Coors has reduced total debt by \\$1.5 billion since 2012 with leverage within Molson Coors' targeted range.
Funds from operations (FFO) adjusted leverage was 3.4x. Given the previously mentioned FCF headwinds for 2015, Fitch expects FFO adjusted leverage will weaken to the mid-to-high-3x range by year-end before strengthening to less than 3x in 2016. Fitch projects leverage will rise modestly.
KEY ASSUMPTIONS
Additional key assumptions within the rating case for the issuer include:
--FCF of less than \\$50 million (including pension contribution and dividend) in 2015 due to a material increase in cash taxes, foreign exchange headwinds of approximately \\$75 million and expected pension plan contributions of \\$260 million-\\$270 million;
--The forecast does not assume any further debt reduction;
--FFO adjusted leverage will increase to 3.7x (including UK pension contribution) before decreasing back below 3x in 2016;
--Cash levels will reduce over the long term to \\$250 million-\\$300 million with the focus on the PACC model;
--EBITDA margins will remain stable at current levels.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a positive rating action include:
--Sustained FFO adjusted gross leverage under 3x;
--Demonstrated ability to sustain FCF margin above 5%, adjusted for MillerCoors;
--FFO margin in the 13% range adjusted for MillerCoors;
--EBITDAR margin sustained in the low 20% range adjusted for MillerCoors;
--Relatively stable volume and pricing trends for their brands in their largest markets, the U.S., UK and Canada, driven by key flagship brands with growing contributions from above-premium brands.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Increased debt and leverage such that FFO adjusted leverage is maintained above 4x for an extended period;
--While not anticipated, pressure could also be placed on the ratings through sustained material declines in EBITDA due to volume and/or margin contraction;
--The inability to offset volume declines with price increases due to heightened competition;
--A large debt-funded acquisition of the remaining 58% stake in the MillerCoors joint venture. Fitch views a potential MillerCoors acquisition as event risk;
--A change in financial policy that would result in debt-funded shareholder returns through share repurchases and increased dividends.
Good Liquidity, FCF Headwinds for 2015
In addition to \\$414 million in cash at the end of the second quarter 2015 that is primarily held offshore, Molson Coors has a \\$750 million five-year multicurrency credit facility that expires in 2019. The credit facility supports the company's \\$750 million commercial paper (CP) program. Molson Coors' CP borrowings totalled \\$65 million at the end of the second quarter 2015 with no other borrowings drawn on the revolving credit facility. Molson Coors' maturities during the next three years are CAD900 million unsecured notes due in 2015 and \\$730 million due in 2017 including CAD500 unsecured notes and \\$300 million unsecured notes. Fitch expects Molson Coors to target longer-term cash balances in the range of \\$250 million to \\$300 million.
LTM FCF (calculated as cash flow from operations [CFFO] less capital expenditures, pension contributions and dividends) was \\$331 million. FCF expectations for 2015 are for less than \\$50 million down from \\$735 million in 2014 due to several factors including the timing of working capital payments, cash contributions to defined pension plans, increased capital investment, higher cash taxes, and foreign exchange pressure. Fitch views Molson Coors longer-term normalized FCF generation to be at least \\$350 million.
Molson Coors has changed its capital allocation focus by targeting increased shareholder distributions, since the company has reduced leverage to pre-StarBev levels. Since 2013, Molson Coors has increased its annual dividend by 28% to \\$1.64 per share which represents a dividend payout of 21% of 2014 underlying EBITDA, within management guidance of 18% to 22%. In 2015, Molson Coors announced a four-year \\$1 billion share repurchase program that will be weighted toward the back half of the period as free cash generation increases. Net share repurchases in the first half of 2015 were \\$50 million.
Fitch's current corporate ratings for Molson are as follows:
Molson Coors Brewing Company (Parent)
--Long-term Issuer Default Rating (IDR) 'BBB';
--Short-term IDR 'F2';
--Commercial paper rating 'F2';
--Bank credit facility rating 'BBB';
--Senior unsecured debt rating 'BBB'.
Molson Coors Capital Finance ULC
--Senior guaranteed unsecured debt 'BBB'.
Molson Coors International LP
--Senior guaranteed unsecured debt 'BBB'.
Molson Coors European Finance Company
--Guaranteed Bank credit facility Term Loan B-C rating 'BBB'.
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