DBRS Confirms Molson Coors and Related Entities at BBB, Stable

DBRS has today confirmed the short- and long-term ratings of Molson Coors Brewing Company (Molson Coors or the Company) and its related entities at R-2 (middle) and BBB, respectively. The trends are Stable. The confirmation of the ratings is based on a modest improvement in the Company’s financial profile since the acquisition of StarBev L.P. (StarBev), as well the expectation of continued deleveraging, but also reflects difficulties in the Company’s efforts to grow sales volumes in core markets. The Company’s ratings continue to be driven by its strong brands and solid market positions in core markets, as well as improving geographic diversification. The ratings also reflect the intense competition from other brewers, growing demand for wine and spirits, the mature nature of Molson Coors’ core markets and sensitivity to input cost volatility and economic cycles.

Molson Coors’ earnings profile remained relatively stable in 2012 and into Q1 2013, as revenues increased primarily due to the acquisition of StarBev and positive net pricing in Canada, while sales volumes in all core markets continued to decline. Operating margins (excluding MillerCoors) declined modestly due to higher input costs and fixed-cost deleveraging resulting in a modest increase in EBITDA (including equity income from MillerCoors) to approximately $1.2 billion in the last twelve months ended Q1 2013.

In terms of financial profile, Molson Coors remains weak for the current rating category as the Company focuses on deleveraging subsequent to the acquisition of StarBev. Cash flow from operations declined modestly as a result of acquisition-related expenses, while capex declined moderately from elevated levels in 2011 and cash dividends increased modestly. As such, Molson Coors generated free cash flow of approximately $580 million in 2012.

Molson Coors used approximately $2.85 billion of debt (including convertibles) as well as cash on hand to complete the acquisition of StarBev in June 2012 for approximately $3.4 billion. The Company used free cash flow generated in H2 2012 to repay approximately $180 million of the bank debt used to complete the transaction. Balance-sheet debt at year-end 2012 was approximately $4.9 billion (including convertibles) resulting in debt-to-EBITDA (including convertibles) of 3.83 times (x) and EBIT coverage of 4.82x.

Going forward, DBRS expects Molson Coors’ earnings profile to remain relatively stable as the Company continues the integration of StarBev while focusing on reducing costs and leveraging its strong portfolio of brands through line extensions. Net revenues, including a full-year contribution from StarBev, should increase in the low-single-digit range in the medium term, based on modest improvement in volume offset by lower pricing. EBITDA margins (excluding MillerCoors) will remain pressured by input cost inflation and changes in mix, at least partially offset by cost reduction and efficiency improvement initiatives. Equity income from MillerCoors is expected to increase in the low- to mid-single-digit range in the near to medium term. As such, EBITDA is expected to grow toward $1.4 billion in the medium term.

DBRS expects Molson Coors’ financial profile should improve to a level commensurate with the current rating category over the near to medium term as it continues to use free cash flow to repay debt in an effort to deleverage subsequent to the acquisition of StarBev. Cash flow from operations should continue to track operating income while capex spending is expected to increase as the Company integrates the central European business and focuses on improving efficiency. Dividends are expected to remain stable as the Company focuses on debt repayment. As such, free cash flow is expected to be in the $525 million to $550 million range in the near to medium term. Molson Coors is expected to use cash on hand, free cash flow generated and short-term financing (commercial paper or credit facility) to repay its approximately $1.25 billion of maturing convertible notes in F2013. Subsequent to the repayment, DBRS forecasts that Molson Coors debt-to-EBITDA will improve from 3.76x at Q1 2013 (including convertible notes) to approximately 3.31x. DBRS expects that Molson Coors will use excess cash on hand and free cash flow generated to repay indebtedness in the medium term as it aims to improve credit metrics toward levels appropriate for the current rating category (i.e., debt-to-EBITDA in the 2.5x range and EBIT coverage toward 6.0x). Should the Company’s credit metrics fail to display consistent improvement and not be tracking toward a return to targeted levels by the end of F2014 due to weaker-than-expected operating income or more aggressive-than-expected financial management, a negative rating action could result.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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