TEXT - Fitch rates Brown-Forman proposed note offering
Dec 10 - Fitch Ratings has assigned an 'A+' rating to Brown-Forman Corporation's (Brown-Forman) proposed $750 million notes offering. Fitch currently rates Brown Forman 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. Proceeds from the $750 million notes offering and $100 million of cash on-hand will be used to fund the company's $850 million one-time special dividend announced on Nov. 27, 2012, which is 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 At the end of the second quarter of fiscal 2013 or Oct. 31, 2012, Brown-Forman had $368.5 million of cash, with $266 million being held by foreign subsidiaries, and approximately $512 million of debt. Total debt-to-operating EBITDA pro forma for the debt-financed dividend is estimated at 1.5x. Pro forma leverage is in line with the current rating category, but the incremental debt eliminates room in the company's ratings during 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 special dividend, Brown-Forman's credit metrics were strong for the rating category and were the best of Fitch rated peers. For the 12-month period ended Oct 31, 2012, total debt-to-operating EBITDA was 0.57x, operating EBITDA-to-gross interest expense was 35.0x, and funds flow from operations (FFO) adjusted leverage was approximately 1.0x. Free cash flow (FCF - defined as cash flow from operations less capital expenditures and dividends) for the period was $247 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, price realization and cost containment, are developing better than Fitch had forecast, despite sales declines in Western Europe due to deteriorating economic conditions and the negative impact of higher pricing and excise tax price increases. 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, 2018. The credit facility is primarily used to support the company's commercial paper program, in which there were no issuances at Oct. 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 $850 million special dividend and 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 approximately 69.3 % of voting shares. Recent Operating and Financial Performance and Outlook: Sales net of excise taxes increased 1.7% to $1.442 billion for the first six months ended Oct. 31, 2012. Sales growth on an underlying basis was 8% which excludes the impact of Hopland -based wine business brands which were sold April 2011, but retained on an agency basis through Dec. 31, 2011, the effect of foreign currency and estimated changes in distributor's inventories. The Jack Daniel's franchise, which experienced 9% net sales growth and was the primary contributor to overall sales growth, aided by Finlandia, El Jimador and the company's super and ultra-premium brands. Operating income, excluding other expenses-net, increased 10.5% to $482.3 million and continued to benefit from by volume gains, better pricing and mix. Brown-Forman anticipates high single-digit growth in sales in fiscal 2013 and raised its operating income growth guidance to low double-digits from the high-single digit range. 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 of fiscal 2013 may continue to 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.