TEXT-Fitch upgrades Pernod Ricard SA to 'BBB-'
Oct 23 - Fitch Ratings has upgraded Pernod Ricard SA's (Pernod) Long-term foreign currency Issuer Default Rating (IDR) and senior unsecured rating to 'BBB-' from 'BB+', and Short-term IDR to 'F3' from 'B'. The Outlook is Stable. The upgrade reflects the achievement of an adequate liquidity position and steady de-leveraging during the financial year ended June 2012 (FY12) as well as Fitch's comfort that future financial policies, combined with moderate and resilient free cash flow (FCF) generation, should afford the company the resources to satisfy its - albeit limited - M&A ambitions. Despite possible cash outlays for some bolt-on acquisition spending, Pernod should manage to retain lease and factoring adjusted net debt/operating EBITDAR at or below 4.0x. Acquisition spending prejudicing a continuation of the past de-leveraging process would however further affect the company's tight financial flexibility at the 'BBB-'rating level. With a lease and factoring adjusted net debt/funds from operations (FFO) ratio of 5.8x at FYE12, as Fitch's preferred leverage measure, Pernod's credit metrics remain weaker than those of 'BB+' and 'BBB-' rated peers in the alcoholic beverage, tobacco and leisure sectors. Fitch projects that, in the absence of M&A activity this ratio should drop below 5.0x by FYE14. High leverage is mitigated by the company's strong and resilient business profile, as well as the magnitude of its annual FCF generation which, at EUR440m in FY12, is larger than higher rated spirits peers Beam Inc ('BBB'/Stable Outlook) and Brown Forman ('A+'/Stable Outlook) although smaller than peers in the beer sub-sector. In order to accommodate sharply growing demand for Scotch whisky and cognac, Pernod is now investing to increase both production capacity and stocks of maturing inventories. Consequently, Fitch projects that the growth of cash flow generation will be held back over the period FY13-FY15 by heavier working capital absorption and higher capex. Despite increased investments in maturing inventories, Fitch expects Pernod to be able maintain FCF above EUR400m per year. Pernod's volume size, brand and category portfolio, as well as geographic diversification, with important presences both in mature and developing markets, place its operations in a different league to other industry players. This profile underpins its capacity to generate consistent organic revenue and profit growth and alleviate pressure for M&A activity. As a point of vulnerability, Fitch notes that Pernod's organic growth has been more than proportionately driven by the sale of high-end products (notably long-aged whiskies, cognacs and champagne) in its Asian markets. At the same time, Fitch notes that in the event of a slow-down of this market the company would be in a position to flex some of its advertising & promotion expenditure in order to protect its profits. WHAT COULD TRIGGER A RATING ACTION? Negative: Future developments that may, individually or collectively, lead to a negative rating action include: - Net Lease and factoring adjusted debt / FFO greater than 5.0x - Fixed charge cover ratio under 3.0x - EBITDA margin dropping below 25% and FCF below EUR200m on a sustained basis Positive: Although Fitch considers the scope for an upgrade to be limited until at least 2014, upward rating pressure could materialise in the presence of: - Net Lease and factoring adjusted debt / FFO under 3.5x - 3.7x - Fixed charge cover ratio above 5.0x. A pre-condition for an upgrade would be Pernod maintaining FCF above EUR700m and preserving its position within the top three players in the industry. Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Corporate Ratings Methodology', dated 9 August 2012 is available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology
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