Fitch Affirms Molson Coors' Ratings at 'BBB/F2'; Rates CP 'F2'

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on Molson Coors Brewing Company (Molson Coors) and its related entities:

The following ratings have been affirmed:

Molson Coors Brewing Company (Parent)

--Long-term Issuer Default Rating (IDR) at 'BBB';

--Short-term IDR at 'F2';

--Bank credit facility rating at 'BBB';

--Senior unsecured debt rating at 'BBB'.

Molson Coors Holdco, Inc. (a 100% owned subsidiary of Molson Coors)

--Senior unsecured debt rating at 'BBB'.

Molson Coors International LP (a 100% owned subsidiary of Molson Coors)

--Long-term IDR at 'BBB';

--Senior unsecured debt rating at 'BBB'.

Target Financing Co. (Renamed Molson Coors European Finance Company and a 100% owned subsidiary of Molson Coors)

--Bank credit facility Term Loan B-C rating at 'BBB'.

Coors Brewing Company (a 100% owned subsidiary of Molson Coors)

--Long-term IDR at 'BBB';

--Senior unsecured debt rating at 'BBB'.

The following ratings have been assigned:

Molson Coors Brewing Company (Parent)

--Commercial paper rating of 'F2'.

Molson Coors Capital Finance ULC (a 100% owned subsidiary of Molson Coors)

--Long-term IDR at 'BBB';

--Senior unsecured debt rating at 'BBB'.

Molson Coors Holdco, Inc. (a 100% owned subsidiary of Molson Coors)

--Long-term IDR of 'BBB'.

Target Financing Co. (Renamed Molson Coors European Finance Company and a 100% owned subsidiary of Molson Coors)

--Long-term IDR of 'BBB'.

The following rating has been withdrawn:

Molson Coors Brewing Company (Parent)

--Bank credit facility Term Loan B-C 'BBB'.

Coors Brewing Company (a 100% owned subsidiary of Molson Coors)

--Long-term IDR at 'BBB';

--Senior unsecured debt rating at 'BBB'.

The Rating Outlook is Stable.

Key Rating Drivers

Market Positions:

Molson Coors' ratings are supported by its strong-to-competitive market share positions in large profitable mature beer markets. The company has the second leading market share in the U.S. (through its MillerCoors LLC JV), Canada and the U.K. with 29%, 39%, and 18% share in the respective markets. The StarBev Holdings S.a.r.l (StarBev) acquisition allowed the company to solidify a 22% market share in Europe. Molson Coors brands are some of the most recognizable and valuable in the world and include Coors, Coors Light, Molson, Carling and Staropramen. In the U.S., Coors Light recently became the second best selling beer and Blue Moon is the largest craft beer brand.

Improved Geographic Diversification:

The $3.5 Billion acquisition of StarBev was completed in June 2012 and provided approximately $1 billion of revenue and an estimated $322 million of EBITDA. It has meaningfully increased the company's geographic footprint by providing a number of premium brands in Central and Eastern European Region. Equally importantly, the acquisition provides a platform for Molson Coors to expand its other brands within the region. In 2012, revenues were generated in the following geographies, Canada 28.3%, U.S. 45.3%, UK 17.6%, Europe 6.7% and other 2%. Molson Coors expects revenue from emerging markets mainly within continental Europe to increase to 14% of sales as a result of the StarBev acquisition, which is only reflected for half of the year in 2012.

Credit Statistics & Cash Flow in line with Expectations:

Fitch includes the equity income from MillerCoors within its calculated credit measures since Molson Coors has a significant stake in the JV with 42% ownership and 50% voting control and cash distributions from MillerCoors are regular and roughly equal Molson Coors' equity income in any period. For the year ended Dec. 29, 2012 Molson Coors total debt to operating EBITDA plus equity income of $510.9 was 3.8x and EBITDA to interest was 6.2x. These credit measures reflect StarBev results for approximately six months and are in line with Fitch's forecast. Through a combination of debt reduction and EBITDA growth Fitch believes that the company can delever to below 3.0 times within 18 -24 month period post-closing of the Star Bev acquisition. Fitch expects that Molson's free cash flow (FCF), calculated as cash flow from operations (CFFO) less capital expenditures and dividends at $600 million annually will be used for debt reduction in the near term.

Sufficient Liquidity:

In addition to $624 million of cash at Dec. 29, 2012 Molson Coors has a $550 million four-year multicurrency credit facility that expires in 2016 and $400 million four-year revolving multicurrency credit facility that expires in 2015. These facilities will support the company's newly authorized $950 million commercial paper program. There were no borrowing at year-end nor has the company issued commercial paper. The credit facilities have a leverage ratio test that limits total consolidated debt to consolidated EBITDA of 4.00:1.00, during the period from April 3, 2012 to and including Sept. 30, 2012, stepping down and becoming more restrictive to 3.75:1.00, during the period from Oct. 1, 2012 to and including March 31, 2013, and 3.50:1.0 thereafter. As of Dec. 29, 2012 Molson Coors indicated that it was in compliance with its debt covenants. The company has $1.245 billion of short-term debt consisting primarily of $575 million 2.5% of convertible notes due July 2013 and 500 million euro notes due Dec. 31, 2013 with put rights beginning March 14, 2013, which was issued to finance a portion of the StarBev. Fitch anticipates that the company will pay off a meaningful portion of its short-term debt with its cash balances and FCF in 2013 and refinance the remainder.

Challenging Operating Environment:

Molson Coors' ratings further reflect a continued difficult operating environment illustrated by declines in beer volumes in the major markets of the U.S., Canada and the U.K. driven in part by shifting consumer preferences and lackluster economic conditions and weak consumer spending. The company cycled a 53rd week in 2011. Molson Coors' sales to retailers (STRs) of beer in 2012 declined 1.3%, 4.4% and 9.8% in the U.S., Canada and the U.K., respectively. Central Europe was down 0.6% on a pro forma basis. Equity income in Miller Coors increased 11.6% to $510.9 million driven by pricing, mix and cost reduction. In the U.S. the company out performed in the premium light segment and continued double-digit growth in the craft beer segment. Craft brewers in the U.S. continue to buck the overall volume declines and posted double digit increases, but the craft brewing segment is still relatively small compared to the overall beer market. Canadian results were negatively impacted by the National Hockey League lockout, which was transitory and therefore results should improve in 2012. In additions to the economic conditions noted above the U.K. operations also experienced higher input cost inflation and pension expense. Of concern is a longer-term step down in the profitability of the U.K. operations.

The company's ratings incorporate the consolidating nature of the global beer industry and its maturity, particularly in highly developed markets. The demonstrated ability to reap efficiencies and synergies from scale has encouraged M&A activity. As a result, the beer industry is heavily consolidated on a global and local level. Many beer markets are structured as oligopolies or quasi-monopolies, with high barriers to entry given the distribution networks that industry leaders have built over the years and the long-standing loyalty to locally branded products. While Molson Coors is smaller than its global peers, its family control makes it a difficult target.

Operating Performance:

Net sales increased 11.4% to $3.9 billion reflecting the acquisition of Star Bev in June 2012 partially offset by the additional week in 2011. Operating income increased 4.8% to $948.8, excluding onetime special items of $81.4 million and including equity income of $510.9 million from MillerCoors. Cash flow from operations was $985 million and FCF was $529 million. Molson Coors and MillerCoors have been able to get pricing and mix benefit to substantially offset volume pressures. However, Molson Coors' margins are lower than its larger peers. Fitch expects Molson Coors to continue to focus on cost reductions and move margins closer to its peer group over time.

Sensitivities:

A positive rating action is not anticipated in the near term as the company's credit measures are weak for the rating category. However, if Molson Coors delevers within an 18-24 month period as expected and effectively integrate StarBev operations, while maintaining its cash flow profile and is committed to maintaining leverage in the low 2.0x a positive rating action would be considered.

A negative rating action could result from a failure to reduce debt and leverage is maintained above 3.0x for an extended period. While not anticipated, pressure could also be placed on the ratings through sustained material declines in EBITDA due to volume and/or margin contraction, the inability to offset volume declines with price increases or possibly due to heightened competition or large debt-financed share repurchases. A loss of a major licensing agreement may also result in a ratings review.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012).

Applicable Criteria and Related Research

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

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