DBRS Confirms Molson Coors Brewing Company and Related Entities at BBB, R-2 (middle)

DBRS Limited (DBRS) has confirmed the long- and short-term ratings of Molson Coors Brewing Company (Molson or the Company) and its related entities at BBB and R-2 (middle), respectively. The trends are Stable. The confirmation reflects the Company’s deleveraging (which was expected and incorporated into the ratings following its acquisition of StarBev LP) and acknowledges strategic initiatives taken to overcome market challenges. The Company’s ratings continue to be supported by its strong brands and its improved geographic diversification. The ratings also consider the intense competition from other brewers, shifting consumer preferences toward wine and spirits as well as the mature nature of Molson’s core markets.

Molson has experienced deterioration in net sales over the last 12 months primarily because of foreign exchange changes and a decline in volumes. The Company’s EBITDA and free cash flow also declined notably in this period. Going forward, DBRS expects Molson’s earnings to remain under pressure over the medium term because of intensifying competition and foreign currency headwinds. DBRS expects that the Company’s net sales will decline to approximately $3.6 billion in 2015 ($4.1 billion in 2014). DBRS anticipates that the Company will increase advertisement push for core brands and increase investments in transforming the portfolio toward the above-premium segment. The additional costs of these initiatives should reduce the Company’s operating income in the near term, but help it recover over the medium term. With respect to MillerCoors’ product portfolio, the Company is expected to focus on core brands and amplify above-premium brands. That said, the Company’s overall EBITDA margins over the near to medium term will continue to be pressured by contraction in volumes and the costs related to strategic initiatives. As such, EBITDA is expected to be approximately $1.1 billion in 2015 (versus $1.4 billion in 2014).

Cash flow from operations should continue to track operating income while capital expenditure (capex) is expected to remain relatively stable (at $300 million to $350 million) over the medium term. Cash outlays related to dividends are also expected to remain steady ($300 million to $330 million per year) in the medium term. As such, free cash flow before changes in working capital should decline to approximately $450 million to $500 million in the near term. DBRS expects that Molson will use excess cash on hand and free cash flow generated to invest in growth and/or increase returns to shareholders as opposed to repay debt. As such, lease-adjusted debt-to-EBITDAR is predicted to increase to the range of 2.5 times (x) to 3.0x in the near term from 2.35x in 2014. Considering that the change in this metric was driven significantly by foreign exchange movements, DBRS views the present deterioration within the bounds of the current rating. Continued decline in volumes over the medium term that is likely to cause deterioration in the core earnings profile of the Company could result in a negative rating action.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Consumer Products Industry (October 2014), which can be found on our website under Methodologies.

Senior Notes of Molson Coors Capital Finance ULC and the Senior Unsecured Notes of Molson Coors International LP are guaranteed by Molson Coors Brewing Company.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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