DBRS Confirms Molson Coors at BBB (high)

DBRS has today confirmed the ratings of Molson Coors Brewing Company and its affiliates (Molson Coors or the Company) at BBB (high), with a Stable trend. Molson Coors has performed well over the past year despite softening beer industry demand conditions and input cost pressures. The Company is among the largest brewers in the world, with solid market positions in its core Canadian, U.S. and U.K. markets, a strong brand portfolio, and a favourable financial profile. The rating also takes into account the highly competitive and mature industry conditions in which Molson Coors operates, and the potential risks related to growth from future acquisitions.

Molson Coors’ financial profile improved over the past year, with credit metrics that are well placed within the current rating. Price increases and efficiency gains helped to offset the impact of input cost inflation and declining overall beer volumes on earnings. Importantly, the integration of MillerCoors is progressing well, and the joint venture was a key contributor to earnings growth in 2009, despite softer Q4 2009 results. Molson Coors recently increased its synergy expectations from MillerCoors, which, in DBRS’s view, further reduces the risk associated with potential integration challenges.

DBRS expects debt and related coverage ratios to remain within the range of acceptability for the rating, with modest growth in earnings and cash flow. MillerCoors is likely to become an increasing source of net cash flow for the Company, as the capital investments required to capture synergies (which have been substantial through 2009) are largely complete. As such, Molson Coors should continue to generate favourable free cash flow (before working capital), which adds to financial flexibility. With respect to the $300 million in Senior Notes that mature in September 2010, redemption or refinancing is not expected to be an issue.

A key challenge facing Molson Coors is the ability to maintain its market share and offset the impact of softer industry demand. While the Company’s competitive position remains very strong in the United States (second largest) and Canada (co-leader with Labatt Brewing Company Ltd. (Labatt)), craft/regional brewer competition has increased and is expected to persist. In addition, price increases will likely be more difficult to implement, particularly given the continuing pressure on volumes.

The Company is expected to be acquisitive, mainly given its modest debt levels and expected favourable free cash flow generation, which provides event risk. DBRS expects that Molson Coors will focus on smaller investments, similar to its recent Granville Island and Cobra acquistions, for future growth in light of mature beer market demand and the industry trend of consolidation. However, a large acquisition could lead to an increase in debt and potential integration uncertainties, and would be treated as an event by DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Consumer Products, which can be found on our website under Methodologies.

This is a Corporate rating.