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Fitch Revises Outlook on Constellation Brands to Positive; Affirms IDR at 'BB'

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  Published in House and Home on Friday, May 27th 2011 at 10:55 GMT by Market Wire
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CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed Constellation Brands, Inc.'s (NYSE: STZ) Issuer Default Rating (IDR) at 'BB'. The Rating Outlook is revised to Positive from Stable. A complete list of ratings is provided at the end of this release.

Rating Rationale:

--The Positive Outlook reflects STZ's greater than expected debt reduction in fiscal year (FY) 2011 and its continuing commitment to reducing debt. STZ's debt has declined dramatically since May 31, 2008, when the company's debt levels peaked at almost $5.3 billion. As of Feb. 28, 2011, STZ had $3.2 billion of debt. The reduction was funded by solid free cash flow (FCF) generation and proceeds from asset dispositions.

--Fitch recognizes STZ also prioritizes returning cash to shareholders as evidenced by its $500 million share repurchases authorization. However, Fitch expects this program to be funded with internally generated cash flow. Share repurchases are expected to be executed over a multi-year horizon.

--STZ's ratings reflect the company's leading market positions and well-known portfolio of wine, spirits and beer brands. The ratings balance general profitability stability, good operating margins, consistent FCF generation and declining leverage against the company's acquisitive nature.

Key Rating Drivers:

--The rating could be positively affected by achieving leverage, defined as total debt-to-adjusted operating EBITDA, closer to 3.0 times (x) and prudently managing share repurchases below the level of FCF generation. A lower leverage target range than 4.0x to 3.0x would also positively affect the rating.

--Operating results materially below expectations could lead to a stabilization of the Outlook. Fitch notes the company grew volume in North America in FY 2011 but operating margins slipped due to heightened promotional activity. Should promotional activity increase from FY 2011 levels, STZ's results could suffer as it seeks to pullback on promotions.

--A resumption of large debt-financed acquisitions could lead to a Stable Outlook or negative rating actions. STZ has a history of large debt-financed acquisitions. While STZ is currently focusing on organic growth of its businesses, the company stated that it would be open to acquisitions. STZ is limiting its targets to those that would be accretive and fit with the company's premium positioned portfolio of wine, spirits and beer.

Liquidity, Leverage and Debt Structure:

STZ's liquidity remains adequate. As of Feb. 28, 2011, the company had a liquidity position of $762.4 million including $753.2 million of availability under its revolving credit facilities and $9.2 million of cash and equivalents. The company has a light maturity schedule in FY 2012 with $15.9 million long-term debt maturing before facing substantially higher maturities in fiscal 2013, 2014, and 2015 of $471.1 million, $468.7 million, and $650.3 million respectively. Fitch expects the company to direct a significant portion of FCF towards debt reduction but will need to refinance a good portion of upcoming maturities as it simultaneously executes its share repurchase program. Debt balances are expected to be reduced but not at the same pace as the prior two years.

The company has consistently generated FCF, averaging over $300 million of FCF annually over the past five years. After recording $530 million of FCF in fiscal 2011, the company expects to generate between $600 million and $650 million of FCF in fiscal 2012. Fitch views this range as reasonable given anticipated continued solid operating performance, the completion of large restructuring programs, and the cash tax benefits of its most recent divestiture.

As a result of the company's significant deleveraging, credit protection measures have improved with leverage down to 3.6x at the end of fiscal 2011 from 4.4x last year and adjusted EBITDA plus equity income/interest expense up to 4.5x from 3.2x. Equity income is included since Crown Imports LLC, the company's joint venture (JV), contributes almost all of that income and pays a cash dividend that is in line with the equity income. Moderate improvement in these measures is expected over the next couple of years, absent any debt financed acquisitions, with sustained debt reduction and moderate earnings growth. Under its bank loan facility, it is required to maintain total debt to adjusted EBITDA less than 5.5x and interest coverage greater than 2.5x. As of Feb. 28, 2011, the company had ample latitude with respect to both measures.

Fitch believes the security of the credit facility, being equity in subsidiaries rather than hard assets, is relatively weak and therefore has chosen not to distinguish between the secured credit facility rating and the senior unsecured notes rating at the 'BB' level. STZ's capital structure does not provide an advantage structurally to any one issue. STZ is the issuer of all the company's notes outstanding and the borrower under its credit agreements for its facilities.

Fitch has affirmed the following ratings:

--IDR at 'BB';
--Secured bank credit facility at 'BB';
--Senior unsecured notes at 'BB'.

The Rating Outlook is revised to Positive from Stable.

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

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

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010).

Applicable Criteria and Related Research:
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

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