TEXT - Fitch comments on Brown-Forman

Tue Nov 27, 2012 1:26pm EST

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Nov 27 - Fitch will not take any rating action following Brown-Forman
Corporation's (Brown-Forman) $4 per share special dividend announcement.
Brown-Forman's long-term Issuer Default Rating (IDR) is 'A+' and short-term IDR
is 'F1'. The Rating Outlook is Stable. A full list of ratings is provided at the
end of this press release. 

The $4 per share or estimated $850 million payout to Class A and Class B 
stockholders of record on Dec. 12, 2012 is a one-time special dividend expected 
to be paid on Dec. 27, 2012. The special cash dividend is in addition to the 
9.3% increase in the company's regular cash dividend announced on Nov. 15, 2012.

Fitch expects the special dividend to be substantially debt-financed. At the end
of the first quarter of fiscal 2013 or July 31, 2012, Brown-Forman had $361.5 
million of cash, with 71% being held by foreign subsidiaries, and approximately 
$511 million of debt. Total debt-to-operating EBITDA pro forma for the 
debt-financed dividend is estimated at 1.5(x). Pro forma leverage is in line 
with the current rating category but limited room exists in the company's 
ratings in the near-term. 

Rating Rationale:

Brown-Forman is one of the largest spirits companies in the U.S. and the seventh
largest worldwide according to Impact, an alcoholic beverage trade newsletter. 
The company's consistent and sizeable operating earnings and cash flow 
generation is derived from a strong and competitive brand portfolio. These 
elements combined with conservative financial strategies with regard to 
acquisitions and share repurchases have resulted in a solid credit profile.

Prior to increased leverage from the dividend, Brown-Forman's credit metrics 
were strong for the rating category and were the best of Fitch rated peers. For 
the twelve-month period ended July 31, 2012, total debt-to-operating EBITDA was 
0.58x, operating EBITDA-to-gross interest expense was 31.8x, and funds flow from
operations (FFO) adjusted leverage was 1.0x. Free cash flow (FCF - defined as 
cash flow from operations less capital expenditures and dividends) for the 
period was $272.4 million. 

Fitch expects leverage to gradually decline following the special dividend due 
to cash flow growth and modest debt reduction. Operating trends, as represented 
by volume growth and price realization, are developing better than Fitch had 
anticipated.

Major contributors to Brown-Forman's operating earnings are its Jack Daniel's 
franchise, which is the fifth-largest premium spirits brand and the largest 
selling American whiskey brand in the world including its highly successful line
extensions, and ready-to-drink beverages. Brown-Forman's other major brands are 
Finlandia Vodka, Southern Comfort Liqueur and El Jimador Tequila. 

Brown-Forman's spirits portfolio competes in the super premium to premium 
category and skews toward whiskeys, liqueurs and bourbons. Fitch views this as a
competitive strength because the aging process and inventory investments 
required are a barrier to entry providing an impediment particularly for value 
competition. The company also has good geographic diversification with net sales
contribution in FY 2012 of 42% from the United States (the world's most 
profitable spirits market), 27% from Europe and 31% from the rest of the world. 
In addition to the convenience factor, Brown-Forman's ready-to-drink and 
ready-to-pour products effectively diversify its product mix. 

Debt Structure and Liquidity:

All of Brown-Forman's debt is senior and unsecured with approximately $250 
million maturing in both 2014 and 2016. The company has an undrawn $800 million 
five-year credit facility, which can be expanded by $400 million and expires 
Nov. 18, 2017. The credit facility is primarily used to support the company's 
commercial paper program, in which there were no issuances at July 31, 2012. The
credit facility includes an interest coverage financial maintenance covenant of 
3.0x. 

Rating Drivers:

 

Industry risk factors and Brown-Forman's high concentration of earnings from its
Jack Daniel's franchise, which represents on an annual basis approximately 51% 
of the depletions of the company's major brands and plays the largest role in 
limiting the company's ratings to the 'A' category, make an upgrade unlikely. 
Industry risk factors include industry structure, regulations related to alcohol
sales, consumption patterns, and consolidation. 

Fitch believes Brown-Forman could participate in industry consolidation with 
bolt-on acquisitions that are not expected to increase leverage materially in 
the near-term. The company's acquisition strategy is to acquire brands with 
growth potential and that complement its current portfolio. 

Current ratings incorporate Fitch's expectation that total debt-to-operating 
EBITDA will not exceed 1.5x (or 2.0x on a lease adjusted basis) for an extended 
period of time after factoring in the company's acquisition strategy. Leverage 
exceeding those amounts will likely lead to a negative rating action. Merger and
acquisition risk from an unsolicited takeover is unlikely because the Brown 
family controls 69.3 % of voting shares. 

Recent Operating and Financial Performance and Outlook:

 

Sales net of excise taxes increased 4.3% to $637.8 million for the first quarter
ended July 31, 2012, benefiting from continually high single-digit depletion 
rates from its Jack Daniel's franchise and low single-digit from Finlandia. 
Higher trade sales in anticipation of a price increase also contributed to 
revenue growth during the period. Operating income, excluding other expenses, 
increased 18.1% to $223.5 million driven mainly by volume gains and partially 
offset by unfavorable foreign exchange.

Brown-Forman anticipates high single-digit growth in sales and operating income 
in fiscal 2013. Although the company has good geographic diversification, an 
economic slowdown or a recession in more than one major market may dampen 
top-line growth. In addition, sales in advance of the price increase during the 
first quarter will slow growth during the subsequent periods.

What Could Trigger a Rating Action:

 

Future developments that may, individually or collectively, lead to a positive 
rating action include: 

--An upgrade is unlikely given Brown-Forman's dependence on the Jack Daniel's 
franchise. 

Future developments that may, individually or collectively, lead to a negative 
rating action include: 

--Larger than expected debt-financed acquisitions that result in total 
debt-to-operating EBITDA  exceeding 1.5x or total adjusted debt-to-operating 
EBITDAR exceeding 2.0x could lead to a ratings  downgrade; 

--A significant and sustained loss of market share for the Jack Daniel's brand 
could also contribute to negative rating actions. 

Fitch currently rates Brown-Forman Corporation as follows:

--Long-term Issuer Default rating (IDR) 'A+'; 
--Senior Unsecured Notes 'A+'; 
--Bank Credit facility 'A+'; 
--Short-term IDR 'F1'; 
--Commercial Paper 'F1'. 
The Rating Outlook is Stable.
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