DBRS Morningstar Confirms Molson Coors Beverage Company at BBB (low), Maintains Negative Trend

DBRS Limited (DBRS Morningstar) confirmed the Molson Coors Beverage Company’s (Molson Coors or the Company) Issuer Rating and Senior Unsecured Debt rating at BBB (low) and Commercial Paper rating at R-2 (low). Additionally, DBRS Morningstar confirmed the BBB (low) rating on the Senior Unsecured Notes from subsidiary Molson Coors International LP. Molson Coors guarantees the Senior Unsecured Notes from its subsidiary. The confirmations reflect DBRS Morningstar’s view that while the Coronavirus Disease (COVID-19) pandemic-related lockdowns and restrictions have had an adverse impact on the Company’s earnings and operations in 2020, global vaccine roll-outs and reopening of on-premise channels in the Company’s core markets will lead to a sequential improvement in the Company’s earnings in 2021. The confirmations also take into account the Company’s adequate measures to conserve capital (including dividend suspensions) and ongoing cost-saving initiatives, ensuring its leverage ratio was below 4 times (x) at the end of F2020. However, the trends on all ratings are still Negative because there is still considerable uncertainty around the pace and magnitude of economic reopenings and the Company’s operating performance during this period.

On May 6, 2020, DBRS Morningstar changed the trend on the ratings to Negative from Stable amid concerns that the pandemic and the macroeconomic aftereffects, combined with an already challenging operating environment, will likely have a material negative impact on Molson Coors’ earnings profile and could delay its deleveraging plan. DBRS Morningstar expected volumes in the on-premise channels to be severely affected because of restrictions on restaurants, bars, and public events across Molson Coors’ core markets. DBRS Morningstar also noted that while the Company could conserve capital to defend credit metrics through debt reduction, changing the trend to Stable would be more influenced by stabilization and meaningful recovery in the operating income rather than debt reduction. Adversely, if Molson Coors fails to return credit metrics to a level more acceptable for the current BBB (low) rating (i.e., lease-adjusted debt-to-EBITDA ratio sustained below 4.0x) because of weaker-than-expected operating performance and/or more aggressive-than-expected financial management, DBRS Morningstar could downgrade Molson Coors’ ratings.

For the full-year F2020 (ended December 31, 2020), Molson Coors’ sales declined materially (8.7% year over year) because of substantial volume declines primarily as a result of pandemic-related closures of on-premise channels. The European region was severely affected as the on-premise segment constitutes approximately 60% of regional sales, while the North American business was comparatively steady, with healthy growth in the off-trade segment. As such, revenue declined to $9.7 billion in F2020 from $10.6 billion in F2019. Despite volume deleverage, the Company did well to grow EBITDA margins to 22.3% from 22.0% during the same period as higher material/packaging expenses were offset by cost-saving initiatives. As such, EBITDA decreased by 8% to $2.1 billion in F2020 from $2.3 billion in F2019. While cash flow from operations tracked the decline in operating income, free cash flow remained steady during F2020, benefitting from the Company’s capital conservative measures (including dividend suspensions), and were used primarily for debt repayment of approximately $1 billion. As such, the lease-adjusted debt-to-EBITDA ratio improved to approximately 3.9x at the end of F2020 from 4.5x at the end of the last 12 months ended Q1 2020.

The rating trends are still Negative because DBRS Morningstar believes, at least in the near term, Molson Coors’ earnings will likely continue to be affected by the ongoing restrictions and weaker consumer demand in the on-premise segment, though to a much lesser extent compared with the last year. Global vaccine roll- outs and economies reopening are likely to result in a gradual recovery; however, the pace and magnitude of recovery is difficult to predict at this time. Molson Coors’ sales are concentrated in the U.S., UK, and Canada where the coronavirus vaccination rate, currently at 28%, 45%, and 12%, respectively, is comparatively higher than rest of the world, and these countries also have the highest vaccine orders per person. Over the near to medium term, the Company is also likely to benefit from its investment in nonalcoholic beverages and the growing hard seltzer market, which may partially offset the secular decline in beer volumes. Looking ahead, DBRS Morningstar expects revenue to grow in the low- to mid-single-digit range with relatively flat EBITDA levels for the full year, with EBITDA improving toward $2.2 billion by F2022 as sales shift back to higher margin on-premise channels and operations are restored to more optimal levels. Ongoing cost-saving initiatives and higher free cash flow amid capital conservative measures will likely support further deleveraging in F2021 and F2022.

DBRS Morningstar could change the trend to Stable if earnings stabilize and there is a sufficient recovery in operating income over the next two to four quarters, such that the leverage ratios remain within acceptable levels. However, should the operating performance continue to be weaker than expected and/or credit metrics deteriorate (i.e., the debt-to-EBITDA ratio rises above 4x on a sustained basis), the ratings could be pressured.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Consumer Products Industry (July 30, 2020; https://www.dbrsmorningstar.com/research/364690), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, “Rating Companies in the Consumer Products Industry” (July 30, 2020) was the primary rating methodology applied to determine the ratings assigned to Molson Coors. “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (January 14, 2021) was applied to assess the corporate structure of Molson Coors and to determine the rating on the Senior Unsecured Notes issued by subsidiary Molson Coors International LP. “DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers” (March 9, 2021) was applied to ensure that the provided liquidity that support the Commercial Paper rating was consistent with the DBRS Morningstar criteria.

The last rating action on this transaction took place on May 6, 2020, when DBRS Morningstar confirmed all ratings but changed the trends to Negative.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12- month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Vikas Munjal, Assistant Vice President, Global Corporates
Rating Committee Chair: Anil Passi, Managing Director, Global Corporates
Initial Rating Date: March 21, 2005

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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-- Rating Companies in the Consumer Products Industry (July 30, 2020) https://www.dbrsmorningstar.com/research/364690
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021) https://www.dbrsmorningstar.com/research/375001
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021) https://www.dbrsmorningstar.com/research/372344
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) https://www.dbrsmorningstar.com/research/373262