Fitch Revises SABMiller plc's Outlook to Positive; Affirms 'BBB+'

Wed Oct 23, 2013 12:31pm EDT

(The following statement was released by the rating agency) MILAN/LONDON, October 23 (Fitch) Fitch Ratings has affirmed SABMiller plc's (SABM) 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 has been revised to Positive from Stable. The senior unsecured ratings of the debt of SABM's subsidiary SABMiller Holdings Inc. has also been affirmed at 'BBB+'. The Outlook revision to Positive reflects SABM's continued strong cash flow generation and its swift de-leveraging two years on since the acquisition of Foster's. In the absence of major M&A activity, Fitch expects the company to continue de-leveraging and to reach a level consistent with an upgrade to 'A-' by FYE15 even allowing some scope for more generous dividend distributions. Mitigating credit risks from M&A activity, Fitch believes SABM has reached a scale that would allow it to more easily fund bolt-on acquisitions. Finally, the probability of major acquisitions has reduced in the global beer industry. KEY RATING DRIVERS Improved Credit Metrics Since peaking at USD17.8bn at YE12, SABM's net debt reduced to USD15.7bn at YE13 and we expect to see a further reduction by YE14 towards the USD14.5bn mark. As a result funds from operations (FFO) based gross leverage should drop to approximately 2.5x-2.7x in FY14 despite some acquisition spending in China during 2013. Considering its strong free cash flow (FCF), SABM's current leverage and its trajectory support a larger headroom for the current 'BBB+' rating. Resilient Cash-Generation In FY13, thanks to the full annual consolidation of the cash generative Foster's operations, SABMiller generated a record USD2.0bn FCF. This follows years (FY09-FY12) of strong FCF despite a continuing contraction in volumes of beer sold in Europe and North America and thanks to growth in other markets, low capex, effective working-capital management and conservative dividend payouts. Leading Global Player SAB's rating is based on its number-two position in the global beer industry and its wide geographical diversification. The company holds leading positions in a number of high-growth developing markets and in the profitable US market through its MillerCoors joint venture - albeit with much lower profitability than leading market player ABI - as well as the number-one position in China. Decelerating Organic Profit Growth Fitch expects weaker organic revenue growth over FY14-FY15 as a result of a deceleration in consumer spending in developing markets. However, profit growth remains underpinned by favourable demand dynamics and a combination of strategic initiatives. These include synergies at Foster's and the company's efficiency programme aimed at centralising some of its business processes and sharing best practices. The company's Business Capability Programme delivered annual cost benefits of USD321m in FY13 and is aiming to reach a cumulative amount of USD450m by FY15. Manageable Currency Mismatch In the event of a simultaneous 30% devaluation of all the soft currencies that affect SABM, the company's FFO-based leverage could worsen by up to 0.3x-0.4x. Fitch regards the probability of these simultaneous devaluations as very low. As a reference, during the 2008 financial crisis, only a few of the currencies in which SABM trades depreciated against the US dollar by up to 30%, and most by no more than 20%. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to a negative rating action, including a stabilisation of the rating outlook, include: - FFO lease adjusted gross leverage above 3.2x on a sustained basis - Continued deterioration of profitability in two or three core markets at the same time (e.g. South Africa and USA) - Increasing vulnerability to currency swings, as evidenced by a shift of the composition of hard currency profits (calculation to include dividends from MillerCoors) and debt to levels similar to the past (e.g. less than 15% hard currency profit; more than 75% unhedged hard currency debt) - Cash flow continuously affected (i.e. reducing below a few hundred million USD) by a strong capex effort or shareholder distributions Positive: Future developments that may, individually or collectively, lead to a positive rating action include: - FFO lease adjusted gross leverage sustainably at or below 2.5x - FFO fixed charge cover of 7.0x - Total FCF not less than USD1.5bn - Confidence that acquisition risk would not compromise credit metrics over an 18 month period Contact: Primary Analyst Giulio Lombardi Senior Director +39 02 8790 87214 Fitch Italia SpA Vicolo Santa Maria alla Porta, 1 20123 Milan Secondary Analyst Ilana Elbim Analyst +44 20 3530 1644 Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' dated 5 August 2013 is available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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