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-- U.S.-based North American Breweries Holdings LLC (NAB) recently announced that it is being acquired by Costa Rican-based Cerveceria Costa Rica S.A. for $388 million.
-- We are assigning our 'B' corporate credit rating to CCR Breweries Inc., which will merge with and into North American Breweries Holdings LLC at the completion of the acquisition.
-- The stable outlook reflects our expectation that the company will maintain credit measures consistent with an "aggressive" financial risk profile, and maintain "adequate" liquidity within the next year. Rating Action On Nov. 27, 2012, Standard & Poor's Ratings Services assigned its 'B' corporate credit rating to Delaware-based CCR Breweries Inc. following the announcement that North American Breweries Holdings LLC (NAB) will be acquired for $388 million by Cerveceria Costa Rica S.A. (CCR, not rated).
The outlook is stable. At the same time, we assigned our 'B+' issue-level rating to CCR Breweries' proposed $175 million senior secured term loan due 2019. The recovery rating is '2', indicating our expectation for substantial (70% to 90%) recovery for creditors in the event of a payment default. Net proceeds of the proposed term loan, along with an approximately $200 million equity contribution from CCR (which CCR will in turn finance with its own term loan (unrated)) will partially refinance NAB's existing debt and fund CCR's acquisition of NAB. At the completion of the transaction, CCR Breweries will merge with and into North American Breweries Holdings LLC.
Our ratings are based on preliminary documentation and subject to review of final documentation following completion of the transaction. Pro forma for the acquisition, we estimate CCR Breweries would have about $192 million in total debt outstanding as of Sept. 30, 2012. Rationale The corporate credit rating on CCR Breweries Inc. reflects our assessment of the company's business risk profile as "vulnerable" and financial risk profile as "highly leveraged." Key credit factors in our business risk profile assessment include its relatively small size and narrow business focus, including product concentration within the mature and highly competitive U.S. beer industry, and exposure to volatile commodity costs.
We view CCR Breweries' financial risk profile as "highly leveraged" despite credit measures pro forma for the financing that are closer to indicative ratio ranges for an "aggressive" financial risk profile and adequate liquidity. This is in part based on our view of the company's financial policy as aggressive following the acquisition, which includes uncertainty about potential increases in future dividend payments to its owner, CCR. NAB was formed following its prior owners acquiring the perpetual, royalty-free license for the Labatt beer brand for the U.S. from Anheuser-Busch InBev N.V./S.A. (A/Stable/A-1) in 2009. Since then the company has acquired substantially all of the assets of High Falls Brewing Company LLC (now known as the Genesee Brewing Co.); and a perpetual license for the Seagram's Escapes and Seagram's Smooth brands from Pernod Ricard USA LLC.
In 2010 NAB acquired Independent Brewers United Inc., a craft brewer in the U.S. and owner of the Magic Hat, Pyramid, and MacTarnahan's brand families of craft beer. NAB is also the exclusive distributor of Imperial beer in the U.S. (a brand owned by CCR). NAB is a very distant No. 6 beer company in the U.S. with an estimated 1.3% share based on 2011 volume, behind larger and financially stronger No. 1 Anheuser-Busch InBev with a 47% share, and No. 2 MillerCoors, with about 28% share, according to Beer Marketer's Insights. NAB participates largely in the import, craft, and flavored malt beverage segment (regular and light) of the U.S. beer market, with a portfolio of 10 owned or licensed brands and regional presence for select brands in certain areas of the U.S., including Upstate N.Y. and Michigan. There is some product concentration risk. Although NAB's core brands include Labatt, Genesee, and Seagram's flavored malt beverage, which together accounted for more than 80% of the company's 2011 volume, the Labatt brand represents about half of the company's total volume. NAB does not have brand rights for Labatt outside of the U.S. so international growth potential is limited.
While the company's portfolio benefits from participation in the craft and import segments, which have been expanding in a declining overall U.S. beer market, its key brand Labatt has experienced volume declines recently and we expect this trend to continue. Moreover, we expect the growth of the craft segment to slow, resulting from continued weak macroeconomic conditions. In addition, the company is exposed to volatile commodity costs, which have somewhat pressured EBITDA margin, and we believe this will likely continue. The acquisition will be funded entirely with debt, including a $175 million term loan at CCR Breweries and an approximately $200 million term loan at its ultimate parent, CCR. We estimate pro forma leverage will be high at CCR Breweries excluding the debt at CCR, with a ratio of adjusted total debt to EBITDA of about 4.5x for the 12 months ended Sept. 30, 2012, following the transaction.
Our base-case forecast assumptions include:
-- Mid single-digit net revenue increase in 2012 and 2013 due to higher volume;
-- EBITDA margin will compress approximately 70 basis points in 2012 as compared to 2011 and then be maintained in 2013;
-- 35% tax rate;
-- Working capital will be essentially neutral on an annual basis;
-- Operating cash flow will far exceed capital expenditures, a portion of which will be used for debt reduction in 2013;
-- We have not factored in the payment of any dividends to CCR, although it is our understanding that CCR Breweries' credit agreement will permit dividends, but with some restrictions;
-- We do not currently expect additional acquisitions. Based on our forecast, we expect credit measures will improve gradually over the next year as the company utilizes a portion of its excess cash flow to repay its term loan, but that its key credit ratios will remain commensurate with indicative ratio ranges for an aggressive financial risk profile by the end of 2013, which include leverage of 4x-5x and FFO to debt of 12%-20%.
However, our view of CCR Breweries' aggressive financial policy includes uncertainty about the potential for increases in future dividend payments to CCR. We believe that any substantial dividend payments could impede the company's expected debt reduction and weaken our projected credit measures. CCR, as owner of CCR Breweries, will have substantial control and influence over its subsidiary, and the ability to decide on future dividend payments. This has resulted in our assessment of CCR Breweries' financial risk profile as "highly leveraged". Liquidity We expect CCR Breweries to have adequate liquidity, with cash sources expected to exceed cash uses for the next 12 to 18 months. Cash sources include cash, FFO, and availability under CCR Breweries' proposed $15 million asset based revolving credit (ABL) facility due 2017 (not rated). Cash uses include working capital, capital expenditures, debt amortization, and potential acquisitions of brands.
Our view of the company's liquidity profile is based on the following assumptions:
-- We forecast cash sources to exceed cash uses by more than 1.2x over the next 12 months.
-- We forecast net sources to remain positive over the next 12 months, even if EBITDA declines by 15%. We also expect sufficient covenant headroom for forecasted EBITDA to decline by 15% without the company breaching financial coverage tests, and that debt will be 15% below covenant limits. The financial covenant levels are still to be determined, but the company has indicated that it expects EBITDA covenant cushion to be about 30%. Maintenance financial covenants will include a maximum leverage and minimum interest coverage covenants.
-- We believe the company has sound banking relationships and expect financial risk management to be generally prudent.
-- We expect that CCR Breweries' $15 million ABL will not be drawn at closing of the transaction, and the company will have full availability under this facility for its seasonal working capital needs, which generally reach about $13 million. Debt amortization is modest for the next few years at less than $9 million per year. Recovery analysis The issue-level rating on CCR Breweries' senior secured term loan is 'B+', one notch above the corporate credit rating. The recovery rating is '2', indicating our expectation for substantial (70% to 90%) recovery in the event of a payment default. For the complete recovery analysis, please see the recovery report on CCR Breweries, to be published following the release of this report on RatingsDirect. Outlook The outlook on CCR Breweries is stable. We expect the company's credit metrics to gradually improve within the next 12-18 months, with leverage declining closer to 4x by the end of 2013.
We could consider a lower rating if operating performance weakens, the company's makes dividend payments to CCR that would preclude this expected improvement in credit ratios, and/or liquidity becomes constrained, including covenant cushion decreasing below 15%. We believe credit ratios would weaken if net sales grew nominally and EBITDA margin declined 50 basis points as compared to our current expectations and the company pays a dividend of $20 million to its owners. Though unlikely in the near term, we could consider raising the rating if the company is able to further diversify its business line and product offerings. However, we believe a potential upgrade is currently constrained by the company's vulnerable business risk profile, and so would require stronger sustained credit measures consistent with a significant financial risk profile.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List New Ratings CCR Breweries Inc. Corporate credit rating B/Stable/
-- Senior secured $175 mil. term loan due 2019 B+ Recovery rating 2
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