DBRS Downgrades Molson Coors to BBB (low) and R-2 (low), Stable Trends, in Advance of MillerCoors Acquisition

DBRS Limited (DBRS) has today downgraded the Issuer Rating and Senior Unsecured Debt rating of Molson Coors Brewing Company (Molson Coors or the Company) and its related entities to BBB (low) from BBB and its Commercial Paper rating to R-2 (low) from R-2 (middle). The trends are Stable. The rating downgrades follow initiatives taken by the Company to finance its pending transaction to acquire the 58% of MillerCoors that it doesn’t already own. This action removes the ratings from Under Review with Negative Implications. The revised rating reflects the significant increase in financial leverage associated with the transaction while considering the benefits of full ownership of MillerCoors, including potential operating synergies. In addition, the revised ratings incorporate an expectation of significant financial deleveraging over the near to medium term. The revised ratings continue to be supported by the Company’s strong brands in its core markets, its improving geographic diversification and the stable nature of its earnings and cash flow. The ratings also continue to reflect the intensely competitive and mature nature of the Company’s core markets.

On November 11, 2015, DBRS placed the ratings of Molson Coors and its related entities Under Review with Negative Implications, following the Company’s announcement that it had entered into a definitive agreement with Anheuser-Busch InBev SA/NV (AB InBev) to acquire SABMiller plc’s (SABMiller) 58% share of MillerCoors (Molson Coors currently owns 42% of MillerCoors), as well as the global rights to the Miller brand family (the Acquisition or the Transaction) for approximately $12.0 billion (excluding transaction fees). The Transaction, which is conditional upon the closing of AB InBev’s acquisition of SABMiller, is expected to close in H2 2016 in view of the material progress achieved thus far with regard to the regulatory approvals for AB InBev’s acquisition of SABMiller.

In its review of the impact of the Acquisition on Molson Coors, DBRS focused on
(1) The Company’s business risk profile: assessing the potential benefits to scale and geographic diversification of the combined entity, as well as the risks associated with integration and realization of synergy potential;
(2) The Company’s financial risk profile on a pro forma basis; and
(3) The outlook for Molson Coors: the Company’s financial management intentions, including its deleveraging plan.

DBRS ANALYSIS
(1) Business Risk Profile: Molson Coors’ earnings in recent years have been challenged by low growth in its core markets and the negative impact of foreign currency movements. The Company’s net sales declined by approximately 14% to $3.6 billion in F2015 compared with $4.1 billion in F2014 primarily because of the negative impact (11.8%) of foreign currency movements. A decrease in consolidated volumes by about 0.6%, and the unfavourable impact of price mix by about 1.6% also contributed to the decline in sales. The loss of the Heineken and Modelo contracts in Europe during F2015 were material to the decline in sales. EBITDA margins (excluding MillerCoors) of continuing operations decreased notably to 16.7% in F2015 from 20.5% in F2014, primarily because of the negative impact of foreign currency movements, incremental brand investments and lower volumes in Canada. Costs related to the restructuring of the Company’s business in China also contributed to the decline in profitability in F2015. The Company’s sales and earnings continued to be impacted negatively by foreign currency movements, albeit with some moderation, in the first quarter of 2016.

DBRS believes that the Acquisition will benefit the Company’s business risk profile materially. DBRS believes that the Transaction will enhance Molson Coors’ competitive position in North America and globally because full ownership of the U.S. business will simplify control and execution of go-to-market strategies. DBRS expects Molson Coors to manage integration risks attendant to the Acquisition adequately based on its experience of successfully executing joint venture operations and integrating acquisitions in the past. DBRS notes that the Company believes it will benefit from approximately $200 million of annualized cost synergies by the fourth full year following the transaction, primarily from procurement improvements, supply network optimization, operational efficiencies and shared services.

(2) Financial Risk Profile: The Company’s free cash flow (before changes in working capital) decreased notably to $95 million in F2015 ($222 million in the last 12 months (LTM) ended March 31, 2016) versus $685 million in F2014 because of the exceptional effect of foreign exchange and restructuring expenses during the year. The decline in EBITDA resulted in financial leverage (lease-adjusted debt-to-EBITDAR) to increase to 2.7 times (x) at the end of F2015 (2.8x in LTM ended Q1 2016) from 2.3x in F2014.

Molson Coors’ financial risk profile will weaken considerably with the impending increase in debt and financial leverage associated with the Acquisition. Molson Coors intends to finance the Transaction with approximately $2.5 billion of equity and $9.5 billion of debt. While the Company has raised the planned equity and $3 billion in pre-payable term loans during the first quarter of 2016, it is in the process of raising the remaining amount of the required debt. DBRS estimates that the Company’s pro forma financial leverage (lease-adjusted debt-to-EBITDA) will increase to above 5.0x in F2016.

(3) Outlook: DBRS estimates pro forma consolidated revenues and EBITDA will shift upward to approximately $11.5 billion and $2.4 billion, respectively, in F2016. DBRS forecasts that consolidated revenues should grow in the low single digits over the medium term and EBITDA should grow to approximately $2.6 billion in F2018, primarily as a result of operational synergies partially offset by unfavourable currency movements.

In terms of flows, DBRS estimates that the Company will generate approximate $1.8 billion of operating cash flow per year in the near to the medium term. Cash outlays related to dividends are expected to remain steady in the range of $350 million to $370 million per year in the medium term as the Company is not expected to increase its dividend meaningfully over this period. The Company’s capital expenditure as per its long range plan is expected to increase from about $275 million in F2015 to an average of about $700 million per year over the medium term. As such, cumulative free cash flow (before changes in working capital but after dividends) in the next three years (F2016 to F2018) is expected to be in the range of $2.2 billion to $2.3 billion (approximately $750 million on average per year).

DBRS recognizes that Molson Coors possesses the ability to deleverage at a good pace going forward, based on its expected sound free cash flow generation. DBRS expects that Molson Coors will abstain from share repurchases and use excess cash on hand and free cash flow generated for debt reduction over the medium term. As such, DBRS estimates that the Company will reduce balance sheet debt by approximately $2.5 billion by the end of F2018. This, combined with growth in EBITDA, should result in financial leverage (between 3.5xand 4.0x), coverage and funds flows that are acceptable for the BBB (low) rating.

Should the Company deliver weaker-than-expected operating income and/or not deleverage by an adequate degree within an acceptable time frame, its credit ratings could be further pressured.

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, which can be found on our website under Methodologies.

The 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.