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Fitch Upgrades STZ's IDR to 'BB' from 'BB-'; Outlook Stable

  //house-home.news-articles.net/content/2010/05/2 .. ades-stz-s-idr-to-bb-from-bb-outlook-stable.html
  Published in House and Home on Friday, May 28th 2010 at 8:31 GMT by Market Wire
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CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has upgraded the following ratings of Constellation Brands, Inc. (NYSE: STZ):

--Issuer Default Rating (IDR) to 'BB' from 'BB-';

--Bank credit facility to 'BB' from 'BB-';

--Senior unsecured notes to 'BB' from 'BB-'.

STZ's total debt was approximately $3.8 billion as of Feb. 28, 2010, including approximately $1.8 billion of borrowings under its credit facility and $1.9 billion of senior unsecured debt. Fitch no longer maintains a senior subordinated debt rating as the company repaid its $250 million senior subordinated debt earlier this year. The Rating Outlook is Stable.

The upgrade is a result of STZ's significant debt reduction over the past several quarters and the expectation for continued debt reduction, albeit at a slower rate. STZ has reduced its debt dramatically since May 31, 2008, when the company's debt peaked at almost $5.3 billion. The debt reduction was due to solid free cash flow generation and proceeds from asset dispositions. As a result of the company's significant deleveraging, debt protection measures have improved with total debt/adjusted EBITDA plus equity income down to 4.4 times (x) at the end of fiscal 2010 from 4.8x last year and adjusted EBITDA plus equity income/interest expense up to 3.2x from 2.9x. Moderate improvement in these measures is expected over the next couple of years with sustained debt reduction and moderate earnings growth.

STZ continues to prioritize debt reduction. However, debt reduction in fiscal 2011 is unlikely to be as substantial as in the past two years without major divestitures. STZ recently received a $300 million share purchase authorization from its Board of Directors and subsequently entered into an agreement to execute the full amount on an accelerated basis. The company expects fiscal 2011 free cash flow (FCF) of $350 million to $400 million and received $60 million in the first quarter of fiscal 2011 from a note receivable related to its sale of its value spirits brands. FCF and the note proceeds should allow for continued debt reduction, after taking into account the company's share repurchase program.

STZ's ratings and Outlook reflect the company's leading global market positions and well-known portfolio of wine, spirits and beer brands. The ratings balance the general stability of the company's operations, good operating margins and consistent free cash flow generation with its high leverage, which has been declining. Any further rating actions will be driven by operating margins and the level of debt reduction balanced against acquisitions and stock repurchases over time.

For fiscal 2011, a sluggish premium wine market and difficult imported beer market in the U.S. due to economic weakness, limited wine growth internationally, and continuing operational difficulties in Great Britain and Australia are challenges. This will result in flat revenue in fiscal 2011. Operating income will also be pressured by these factors as well as anticipated weaker equity income from Crown Imports. However, cost savings will occur as a result of previous restructurings and the global initiative and offset shifts to lower margin business in the U.K. and Australia. Additionally, interest expense is expected to meaningfully decline after the company has reduced debt and repaid its higher coupon subordinated notes.

STZ's liquidity remains adequate. As of Feb. 28, 2010, the company had a liquidity position of $561.4 million including $517.9 million of availability under its revolving credit facilities and $43.5 million of cash and equivalents. The company has a manageable maturity schedule for the next two fiscal years with long-term debt maturities of $187.2 million and $157.8 million in 2011 and 2012, respectively, before facing substantially higher maturities in fiscal 2013, 2014, and 2015 of $467.7 million, $466.5 million, and $647.7 million, respectively.

The company has consistently generated FCF (defined by Fitch as cash flow from operations less capital expenditures and dividends), averaging nearly $300 million of FCF annually over the past five years. After recording $295 million of FCF in fiscal 2010, which was depressed due to a $65 million tax payment due to a divestiture, the company, as previously stated, expects to generate between $350 million and $400 million of FCF in fiscal 2011. Fitch views this range as reasonable given the company's expected operating performance.

Fitch's ratings of STZ are maintained as a service to the users of its ratings. STZ's ratings are based on public information.

Applicable criteria are available on Fitch's website at [ www.fitchratings.com ] and specifically include:

--'Corporate Rating Methodology', dated Nov. 24, 2009;

--'Liquidity Considerations for Corporate Issuers', dated June 12, 2007.

Additional information is available at '[ www.fitchratings.com ]'.

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