DBRS Rates Molson Coors’s $1.9 Billion Senior Unsecured Notes Issue at BBB with a Stable Trend

DBRS has today assigned a rating of BBB with a Stable trend to Molson Coors Brewing Company’s (Molson Coors or the Company) $1.9 billion Senior Unsecured Notes (the Notes) issuance, which includes:

(1) Five-year, $300 million 2.0% notes, due May 1, 2017;

(2) Ten-year, $500 million 3.5% notes, due May 1, 2022; and

(3) Twenty-year, $1.1 billion 5.0% notes, due May 1, 2042.

The Notes will be senior unsecured obligations ranking pari passu with Molson Coors’ other senior unsecured indebtedness and will be guaranteed jointly and severally by certain subsidiaries of Molson Coors on a full and unconditional senior unsecured basis. Proceeds from the offering are expected to be used to partially fund the Company’s upcoming acquisition of StarBev, a leading Eastern European brewer. If the acquisition is not completed on or prior to November 2, 2012, or if, prior to such date, the sale and purchase agreement is terminated, Molson Coors will be obligated to redeem all of the Notes at a redemption price equal to 101% of their aggregate principal amount plus accrued and unpaid interest. In addition, the Notes contain a change of control provision upon which Molson Coors will be required to repurchase the Notes in such event.

On April 3, 2012, Molson Coors announced that it had entered into a definitive purchase agreement with CVC Capital Partners (CVC) to acquire StarBev for approximately $3.54 billion in cash, debt and convertible debt. Molson Coors planned to finance the transaction with cash ($500 million), incremental debt ($600 million bank debt and $1.9 billion new issuance of senior unsecured notes) and convertible debt issued to CVC (approximately $667 million). Please see DBRS’s April 16, 2012, press release and April 24, 2012, report on Molson Coors for further details.

The acquisition of StarBev will provide Molson Coors with a strong portfolio of regional brands, and regional market share of approximately 25%. StarBev’s nearly $1 billion revenue and $300 million EBITDA will also help increase the scale and geographic diversification of the Company, improving the proportion of growth generated from less-mature markets. That said, post-acquisition, revenue from markets with higher growth than current core markets will still be only 14% of the consolidated company on a proforma basis. DBRS does, however, recognize that the difficult macroeconomic environment in Europe could challenge growth prospects in the near to medium term. DBRS also views the risk associated with integrating the acquisition and achieving synergy targets as considerable, as Molson Coors will attempt to retain key personnel, drive increasing efficiency, and introduce new products and processes into a new region.

In terms of financial profile, Molson Coors’ $3.5 billion acquisition of StarBev (approximately 11 times (x) EBITDA) results in a meaningful increase in the Company’s leverage to a level that is no longer consistent with DBRS’s previous BBB (high) and R-2 (high) ratings. At year-end 2011 (i.e., pre-acquisition), DBRS estimates that Molson Coors had balance sheet debt of under $2 billion and EBITDA of approximately $1.1 billion, resulting in the key credit metric debt-to-EBITDA of 1.77x. Proforma the StarBev acquisition (i.e., post-acquisition), DBRS estimates that Molson Coors will have balance sheet debt of nearly $4.4 billion (excluding the convertible debt issued to CVC) and EBITDA of approximately $1.4 billion, resulting in debt-to-EBITDA of 3.2x.

Going forward, DBRS expects that the Company should nevertheless continue to generate healthy levels of free cash flow (at least $500 million), based on strong operating cash flow of approximately $1.1 billion, capex (excluding MillerCoors) in the $200 million to $250 million range, and dividends of approximately $235 million. As such, DBRS recognizes that Molson Coors will possess the ability to deleverage at a good pace and expects the Company to use such free cash flow to reduce financial leverage over the near to medium term. Specifically, DBRS expects debt-to-EBITDA to decline toward the 2.5x level within 24 months of the acquisition.

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

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