TEXT-Fitch affirms SABMiller at 'BBB+'; stable outlook
Sept 21 - Fitch Ratings has affirmed SABMiller plc's (SABMiller) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+' and Short-term IDR at 'F2'. The Outlook on the Long-term IDR is Stable. The agency has also affirmed the 'BBB+' senior unsecured rating of the notes issued by SABMiller Holdings Inc.
SABMiller's ratings are supported by the company's strong operating profile which is commensurate with a higher rating. However, the high leverage resulting from the ca. USD12bn acquisition of Foster's in December 2011, a material mismatch between the currency denomination of debt and profits, as well as a degree of operational volatility arising from the large exposure to developing economies currently constrain the rating at 'BBB+'.
The company's operating strength is represented by its position as the number two global beer player, with very wide geographical presence, an important market share in the profitable US beer market and leading positions in several developing markets across Africa, Asia, Europe and Latin America. Fitch expects SABMiller to continue to benefit from scope for growing per capita consumption of beer in those developing markets. A strong portfolio of brands, both local and international, in multiple price segments further underpins its competitive strength.
Fitch believes that acquisition risk in the beer industry is starting to moderate following the agreement of a number of large transactions in the sector so far this year and the consequently reduced availability of major targets. However, M&A risk remains in the background as major players will likely seek to continue their expansion process once they restore healthier credit metrics.
SABMiller's debt jumped to USD18.6bn at YE12 (YE11: USD8.1bn) causing lease-adjusted FFO-based leverage and lease adjusted debt/operating EBITDAR to reach 3.3x and 3.7x, respectively, on a reported basis (FY12 only included Foster's for 3.5 months). Fitch calculates that on a pro forma basis annualising Foster's, SABMiller's FY12 lease-adjusted debt/operating EBITDAR would have still been well above 3.0x.
These concerns are mitigated by the agency's expectation that future annual FCF should be at least in a range between USD1.8bn and USD2.0bn, providing scope for a swift reduction of leverage. Fitch projects FFO adjusted leverage at or below 3.0x for FY13, and close to 2.5x for FY14. These levels are comfortable for the current 'BBB+' rating.
Fitch views the addition of the Foster's business as an enhancement to SABMiller's operating profile and to its currency mismatch between debt and cash flow. Foster's represents a business with an important market share in the duopolistic beer market of Australia with a healthy profit margin and a substantial FFO contribution. Although integration risks are negligible, Fitch does not expect SABMiller to be able to materially increase Foster's profits. Another benefit of the transaction is the improved share of profits generated in "hard currency" which Fitch estimates now at approximately 30%.
A sensitivity assuming a simultaneous 30% devaluation of all the currencies except for the EUR, AUD against the USD, would cause leverage to deteriorate by a further 0.5x. Given this exposure, Fitch views FYE12 leverage as stretched for the current 'BBB+' rating.
Debt is raised mainly by SABMiller plc (28% as of YE12) and the wholly owned sub-holding SABMiller Holdings Inc (51%). The two companies cross-guarantee each other's debt. For these reasons, the agency has equalised the senior unsecured ratings of notes issued by the two entities at 'BBB+'. The remaining debt is incurred by operating subsidiaries but, although ranking effectively ahead, it is not a material enough proportion to give concerns about structural subordination.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- Gross leverage (total lease-adjusted debt/FFO) remaining above 3x in FY14 and after
- Continued deterioration of profitability in two or three core markets (eg South Africa and the US)
- Increasing vulnerability to currency swings, as evidenced by a decline of the contribution of hard currency profits accompanied by an increase of hard currency debt
- Free cash flow deteriorating to a few hundred million USD as a result of a deterioration of the business, recurring intense capital expenditure efforts or abundant shareholder distributions.
Positive: Although Fitch considers the scope for an upgrade to be limited until at least 2014, a revision of the Outlook to Positive could be considered when there is sufficient visibility over the materialisation of the following parameters:
- Gross leverage close to 2x or below (lease-adjusted debt/FFO) with an FFO fixed charge ratio above 7x on a sustained basis
- Maintenance of free cash flow of at least USD1.5bn.
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