US CREDIT-Anheuser-Busch debt faces weakness on loan paydowns
By Karen Brettell
NEW YORK, Nov 18 (Reuters) - InBev NV's INTB.BR purchase of U.S. brewer Anheuser-Busch Cos Inc (BUD.N) has significantly increased the leverage of the combined company, which may weigh on Anheuser-Busch's debt values in the near to medium term.
InBev closed its purchase to create the world's largest brewer in the biggest cash acquisition in history, and will be known as Anheuser-Busch InBev as of Tuesday. For details, see [ID:nN18249549]
The company now has six months to make an equity rights offering to reduce a $9.8 billion loan it took to fund the deal. It also needs to sell assets to repay an additional $7 billion one-year loan.
"The closing starts the clock ticking on Inbev's bridge loans," Gimme Credit analyst Craig Hutson said in a note on Tuesday.
"The stock has rallied over 10 percent from its low on October 22, but it remains at very depressed levels versus historical valuations," he added. "The rights issue is critical to maintain ratings that are already generous considering the pro forma credit profile."
InBev postponed the rights offering on October 14, citing difficult market conditions. Its stock has risen to $29.19 cents on Tuesday, from a low of $26.79 on Oct. 22. The shares had traded at over $48 in September and over $60 in late 2007.
All three major rating agencies have downgraded Anheuser-Busch's debt rating due to the amount of debt InBev, which is guaranteeing the brewer's debt, took on to fund the deal. Cuts were limited, however, by an expectation the company will be able to reduce its debt load.
Fitch Ratings last month cut Anheuser-Busch two notches to "BBB," the second lowest investment grade, noting that the combined company will initially have too much leverage for its rating, but added this is expected to be only temporary.
"Ultimately, Fitch does expect InBev to raise the required equity," Fitch said. The rating agency, which also ceased rating Anheuser-Busch, added that it expects the combined company's credit measures to be within its rating level by the end of 2011.
In the meantime, Anheuser-Busch's credit spreads are likely to continue to weaken.
The cost to insure Anheuser-Busch's debt for five years with credit default swaps hit a record 160 basis points on Tuesday, or $160,000 per year to insure $10 million in debt, according to Markit Intraday.
"Hedging associated with the drawdown of bridge facilities, combined with competing bond supply to refinance the bridge in the coming months, will pressure Anheuser-Busch's credit valuations," Barclays analyst William Nonneman said in a report on Tuesday.
"In addition, concerns about InBev's ability to execute asset sales and a rights offering could further depress sentiment around the credit story," he said.
InBev Chief Executive Carlos Brito said in a video interview on the company's website that the company only needs to sell two or three of five assets he described as "prized assets" to raise the $7 billion required to pay back the 12 month bridge loan.
In addition to breweries, Anheuser-Busch owns a packaging business and theme parks, including SeaWorld and Busch Gardens.
"The company has targeted five specific assets of which it claims 2-3 would provide the necessary proceeds," Gimme Credit's Hutson added. "Anheuser-Busch's entertainment assets are believed to be part of this list."
However, "while the assets may be saleable, the market environment will make it difficult to achieve the valuations originally envisioned by Inbev," Hutson said.
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