Moody's Places Constellation Brands (STZ) Ratings on Review for Upgrade
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Moody's Investors Service placed the Ba1 Corporate Family and other ratings of Constellation Brands, Inc. (NYSE: STZ) on review for upgrade following its announcement that it will manage its net debt to EBITDA to around 3.5x. At the same time, Moody's raised Constellation Brands' speculative grade liquidity rating to SGL-1 from SGL-3.
Moody's had previously stated that leverage of below 3.5 times could lead to an upgrade. The shift in the leverage target follows a period of heavy investment both in capital expenditures to build out its brewing capacity in Mexico and a string of acquisitions and divestitures that continue to transform the business. The rating review will focus on the company's ongoing financial policy, including the likely shareholder return strategy going forward and the potential risk of ongoing M&A activity. The review will also assess the exposure to political risk resulting from the company's reliance on Mexico for its beer production. Moody's will consider both the company's geographic sales focus on the US, and its growing concentration on premium alcoholic beverages.
Ratings placed on review for upgrade:
Constellation Brands, Inc.:
Corporate Family Rating at Ba1
Probability of Default Rating at Ba1-PD
Senior Unsecured Notes rating at Ba1 (LGD 4)
Senior Unsecured Shelf rating at (P)Ba1
Constellation Brands, Inc.:
Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-3
Constellation Brands, Inc.
Outlook, Changed To Rating Under Review From Stable
Constellation's Ba1 Corporate Family Rating reflects its meaningful scale, and its good product diversification. Constellation's products include an extensive portfolio of premium wine, spirits and imported beers. Constellation is the third largest beer company in the United States -- albeit well behind the leaders -- and the largest imported beer company in the country. Moody's expects that Constellation's portfolio of premium imported Mexican beers will continue to grow faster than the overall U.S. beer market. The Ba1 rating also reflects Constellation's franchise strength and diversity with a presence in all three alcohol categories, as well as its strong cash flow and solid profitability. These strengths are offset by the company's high leverage, its large capital spending requirements, and an aggressive financial policy. An upgrade could occur if the company sustains strong operating profit, and reduces leverage. An upgrade would also require that management show a firm commitment to a more conservative financial policy, including setting financial targets that would reduce leverage levels such that debt to EBITDA is maintained under 3.5 times. Furthermore, there would need to be a clearly articulated commitment by management to being investment grade.
A downgrade could occur if operating performance weakens such that EBITA margins are sustained below 15%, if for any other reason debt/EBITDA is sustained above 4.5 times, or liquidity weakens. In addition, problems related to the brewery expansion in Mexico, further debt-financed acquisitions or debt-financed shareholder returns could also lead to a downgrade.
The change in Constellation's Speculative Grade Liquidity Rating to SGL-1 reflects improved internal and external liquidity with free cash flow expected to reach around $275 million in the next year even after dividends and CAPEX. The company's $1.15 billion credit facility is expected to remain largely undrawn over the next 12 months
The principal methodology used in this rating was Global Alcoholic Beverage Industry published in October 2013. Please see the Rating Methodology page on www.moodys.com for a copy of this methodology.
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