Fitch Sees AB InBev's (BUD) Post-Merger Dividend Limiting Deleveraging

November 28, 2016 11:23 AM EST

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Anheuser-Busch InBev's (ABI) (NYSE: BUD) commitment to maintaining its large dividend will significantly limit the company's ability to deleverage in the wake of its GBP79bn acquisition of SABMiller, Fitch Ratings says.

ABI was downgraded three notches in 2016 as weaker market conditions and the SABMiller acquisition pushed leverage higher. We see positive rating action as unlikely for at least the next two years based on current deleveraging expectations.

Based on management's announcements regarding post-merger dividend policy, we estimate ABI will distribute around USD8bn annually to shareholders. This is roughly our entire projected annual pre-dividend free cash flow (FCF) for 2016-2018, which also assumes ABI can deliver USD1.4bn of targeted synergies and that there is a mild recovery in Brazilian profits.

ABI's 'BBB' rating reflects an unusual credit profile, including a very strong operational profile and LBO-style leverage. Its pre-dividend FCF and EBITDA margins are significantly stronger than the average among 'A' and 'AA' category peers, indicating it has greater debt capacity than higher-rated fast moving consumer goods companies. But it is also an outlier in terms of leverage, with post-merger pro-forma FFO-adjusted net leverage of 5.8x, which is not in line with investment grade rated alcoholic beverages peers.

An upgrade is currently contingent on ABI showing evidence of a path to deleveraging towards at least the upper end of the 'BB' leverage relative to peers. This means we could consider upgrading ABI's IDR if we believe FFO-based net leverage is on a clear trajectory to reduce towards 4.0x-4.5x, which we do not anticipate will happen over the next two years.

Under our current projections we expect net leverage to reduce below 5.0x in 2019. We estimate that annual post-dividend FCF of USD4bn to USD5bn would be required to start making a more meaningful impact on leverage reduction.

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