Fitch Rates Anheuser-Busch InBev's Bond 'A RWN(EXP)'
Fitch is also maintaining Anheuser-Busch InBev's (ABI) and SABMiller plc's (SABM) Long-term Issuer Default Ratings (IDR) on RWN pending completion of the acquisition of SABM by ABI. If the acquisition completes as planned, ABI's Long- and Short-term IDRs, along with existing senior unsecured ratings, will likely be downgraded to 'BBB+', 'F2' and 'BBB+' respectively, from 'A', 'F1' and 'A'.
With respect to SABM's 'A-' RWN ratings, we expect to equalise them with ABI's, subject to SABM's debt ranking equally with ABI's debt and the issuing entities being able to access group cash flow. A full list of rating actions is available at the end of this commentary.
The assignment of the final rating on the bond is subject to the receipt of final documentation conforming to information already received.
The planned issue of USD46bn senior unsecured bonds in seven tranches is expected to be made by Anheuser-Busch InBev Finance Inc. and will be guaranteed on a joint and several basis by Anheuser-Busch InBev SA/NV, Anheuser-Busch InBev Worldwide Inc., Brandbev S.a r.l., Brandbrew S.A., Cobrew NV, and Anheuser-Busch Companies, LLC. The proceeds will be used to fund the acquisition of SABM.
The expected completion of the bonds on 25 January 2016 is not contingent on the acquisition of SABM. There is no escrow account for or security interest for the proceeds. In the event that the acquisition of SABM is not completed by 11 November 2016 (or if ABI extends it to 11 May 2017) or if the acquisition does not materialise, then ABI will be required to redeem all outstanding bonds except for the USD6bn 2036 fixed rate notes and the USD11bn 2046 fixed rate notes. The bonds will rank equally with the company's senior unsecured debt and will enjoy the same guarantee package as the existing bonds of the ABI group.
ABI's likely ratings of 'BBB+' will reflect the company's position as a global leader with a wide portfolio of brands and geographic presence with high profit margins and stable cash flows. However, this is balanced with a more challenging environment in emerging markets and competition from craft beers in its core US market, coupled with declining beer consumption.
We expect funds from operations (FFO) adjusted gross leverage to peak at 5.7x at the close of the transaction in 2016, before deleveraging to approximately 4.4x by 2019 due to substantial free cash flow (FCF) generation. ABI's successful track record of managing previous M&A transactions and the company's enhanced size, improved geographic and brand diversification from this acquisition should help compensate the weaker credit metrics at closing and execution risks.
KEY RATING DRIVERS
Global Leader
The likely merger of the two market leaders ABI and SABM will create a global player with combined revenue of close to USD65bn, EBITDA of approximately USD22bn and pre-dividend FCF of approximately USD12bn. This will be supported by a presence in many duopoly and oligopoly markets with high profit margins and in several others with medium-term growth prospects, even though volume growth is currently at a historical low point. Its geographic reach across the world will be unrivalled.
Increased Leverage
Fitch calculates that the combined ABI-SABM group would have debt of up to USD105bn (end June-2015: USD51.4bn) at completion. Based on this, we calculate that ABI's consolidated FFO adjusted gross leverage should peak at 5.7x by end-2016 (equating to total debt/consolidated EBITDA of 4.7x, up from 2014's 2.6x).
Scope for Subsequent De-leveraging
Management expects to close the transaction by 11 November 2016 or, under certain circumstances, at the latest by 11 May 2017. Based on our estimation of annual pre-dividends consolidated FCF of up to USD12bn, USD300m annual synergies from 2017 and the planned divestment of SABM's 58% stake in MillerCoors for USD12bn and of the Peroni and Grolsch brands for another USD3bn, we expect the merged entity to be able to reduce consolidated FFO adjusted net leverage to around 4.0x only by 2019. This level would still be on the high side relative to the 3.5x median for 'BBB' category alcoholic beverages companies in Fitch's universe. While a temporary reduction of dividend distributions would enhance ABI's de-leveraging trajectory, management is not currently envisaging this.
Structural Considerations
Structural considerations are a factor in our likely downgrade. The acquisition will be made by a new company that is fully-owned by Anheuser-Busch inBev NV/SA and debt used to finance it is not guaranteed by ABI's important 62% owned subsidiary, AmBev S.A., which benefits from a cash-rich balance sheet. The transaction keeps AmBev substantially ring-fenced, therefore we assume ABI's debt repayment will not materially benefit from AmBev's cash flows other than through dividend distributions.
This will maintain the existing mis-match between the debt-free and cash-generative AmBev and ABI's highly leveraged capital structure. Fitch estimates that in 2017 the part of the ABI group that bears all the debt will have a higher FFO adjusted gross leverage than the consolidated group by approximately 0.5x but should diminish over time. .
More Challenging Industry Environment
Compared with a year ago, the global beer industry is suffering from a weaker trading environment, with volumes having contracted in many markets and currency depreciation impacting, in particular, ABI's FCF. While both ABI's and SABM's most recent results (9M15 and 1H15, respectively) reported sound organic profit growth in Latin America, it was eroded by currency headwinds. In 9M15 ABI reported for its core markets of Brazil and Mexico a contraction of EBITDA of 15% and 8%, respectively.
In the core US beer market, both ABI and SABM are losing market share to new independent players offering craft beer and are under pressure to respond with new launches. In 9M15 ABI's sales volumes to retailers were down 1.9% and profit margin contracted by nearly 340 basis points on an organic basis.
Moderate Execution Risks
Integration risks are mitigated by ABI's and SABM's successful track records of managing major M&As in the international beer sector. However, the overall final profile of the combined entity is not yet fully clear and requires some work by ABI's management.
Management has pointed out that discussions with several counterparties are still on-going. These include anti-trust regulators as well as joint venture partners and bottling franchisors. ABI has put up two of its brands, Peroni and Grolsch, for sale to assuage European regulatory concerns. In addition, divestments in China could be necessary to obtain anti-trust approval. We also believe that retention of key SABM management in charge of the African operations would be critical to ensuring continuity of those businesses
KEY ASSUMPTIONS
Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Although subject to shareholder approval, key Fitch forecast assumptions for the merged group include:
- Successful completion of the merger in November 2016 at the terms of the bond prospectus dated 13 January 2016
- ABI's and SABM's reported revenues contracted in the low single digits in 2015 and subsequently recovering
- Total dividend distributions by ABI of approximately USD5bn from 2017
- AmBev's dividend policy remains unchanged
- Total divestment proceeds of USD15.0bn from MillerCoors stake and Peroni and Grolsch brands
RATING SENSITIVITIES
ABI
Upon completion of the transaction, we would likely downgrade the ratings of ABI to 'BBB+'. The ratings will depend on pro-forma leverage on completion and the degree of visibility and credibility of a sustainable de-leveraging path through the deployment of cash flow and divestment proceeds over the first two years after completion.
Positive rating action is currently not envisaged. If the transaction does not proceed, it will likely lead to ABI's ratings being affirmed.
SABM
We may downgrade SABM's ratings to the same level as ABI upon completion of the transaction. However, should SABM's current debt be structurally subordinated to ABI's existing or acquisition debt, its ratings would be further notched down from ABI's IDR.
Positive rating action is currently not envisaged. If the transaction does not proceed, it will likely lead to SABM's ratings being affirmed.
FULL LIST OF RATING ACTIONS
Anheuser Busch InBev NV/SA
Long-term IDR: 'A' maintained on RWN
Short-term IDR: 'F1' maintained on RWN
Senior unsecured rating: 'A' maintained on RWN
Anheuser Busch InBev Worldwide Inc
Senior unsecured rating: 'A' maintained on RWN
AnheuserBusch Companies Inc
Senior unsecured rating: 'A' maintained on RWN
AnheuserBusch InBev Finance Inc
Senior unsecured rating: 'A' maintained on RWN
USD46bn senior unsecured bonds: assigned 'A RWN(EXP)'
SABMiller plc
Long-term IDR: 'A-' maintained on RWN
Short-term IDR: 'F2' maintained on RWN
Senior unsecured debt: 'A-' maintained on RWN
SABMiller Holdings Inc.
Senior unsecured debt: 'A-' maintained on RWN
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