Fitch Affirms Molson Coors' Ratings at 'BBB/F2'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings for Molson Coors Brewing Company (Molson Coors) and its related entities at 'BBB'. The Rating Outlook is Stable. A complete list of the rating affirmations are provided at the end of this release.

KEY RATING DRIVERS:

Market Positions:

Molson Coors' ratings are supported by its well-known respected brands in strong-to-competitive market share positions in large profitable mature beer markets. Molson Coors has the second leading market share in the U.S. (through its MillerCoors LLC JV), Canada and the U.K. with 28%, 38%, and 18% share according to the company in their respective markets. Molson Coors brands are some of the most recognizable and valuable in the world and include Coors, Coors Light (second best selling beer in the U.S.), Molson, Carling and Staropramen. Molson Coors market share gives the firm necessary scale to better leverage fixed costs and take advantage of on-going cost efficiency efforts that permits substantial flexibility for brand reinvestment to bolster their competitive position.

Molson Coors also has good exposure to the faster growing craft beer portfolio in its developed markets. Molson Coors craft segment, while still relatively small compared to their overall beer portfolio, is an important and growing offset to the declines experienced within its premium and value brands due in part to the soft economy. The U.S. craft and import portfolio grew high-single digits in 2013 and includes Blue Moon, the largest craft beer brand in the U.S.

Geographic Diversification:

The $3.5 billion acquisition of StarBev Holdings S.a.r.l (StarBev) completed in June 2012 meaningfully increased the company's geographic footprint by providing a number of premium brands in Central and Eastern European Region. The StarBev acquisition allowed the company to solidify a 21% market share in Europe. This area is expected to grow faster over the longer term although current growth is challenged by the continuing weak macroeconomic environment particularly in certain regions. As such, Molson Coors recorded an impairment charge of $151 million during 2013 on a couple of the European brands due to the economic weakness. Molson Coors anticipates the acquisition will provide a long-term platform for the company to expand its other brands within the region. In 2013, revenues were generated in the following geographies, U.S. 44%, Europe 28%, Canada 26%, and other 2%.

Challenging Operating Environment:

Molson Coors' ratings further reflect the difficult and soft global operating environment illustrated by declines in beer volumes in the company's key markets of the U.S., Canada and Europe. The volume declines are driven by competitive pressures including the shift in consumer preferences to spirits/wine, lackluster economic conditions and weak consumer spending. Molson Coors' sales to retailers (STRs) of beer in 2013 declined 2.8% and 1.9% in the U.S. and Canada respectively. Europe sales volume decreased 0.3% on a pro forma basis in 2013, as demand, negative channel and package mix were partially offset by improved performance in the U.K., as well as overall positive pricing.

Net sales decreased by approximately 3% to $4.2 billion pro forma for the acquisition of Star Bev. Operating EBIT increased 5.4% to $1.025 billion, excluding onetime special items of $200 million and including equity income of $539 million from MillerCoors. 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 improve margins over time.

Equity income in MillerCoors increased 5.5% to $539 million driven by pricing, mix and cost reduction. MillerCoors achieved $102 million in cost savings and a 3.4% increase in domestic net revenue per barrel to offset the volume declines across MillerCoors' premium light, premium and value portfolios. This included a mid-single digit decrease with premium light which is the largest segment in the U.S. The premium light segment has been negatively affected by unemployment rates for young, lower income men that have not been reemployed as the economy recovers. A lack of a long-term recovery for this key demographic segment would lead to structural headwinds once GDP, consumer sentiment and unemployment levels return to normalized levels. Overall, volumes in the U.S. beer industry have declined in four of the five past years.

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.

Credit Statistics and Cash Flow Ahead of 2013 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 2013, Molson Coors leverage (total debt to operating EBITDA plus equity income of $539 million) was 2.8x and EBITDA to interest was 7.3x. This compares to leverage of 3.8x and EBITDA to interest of 6.2x at the end of 2012. Molson Coors leverage reduction was moderately ahead of expectations as the company generated higher levels of free cash flow (FCF) at $635 million that was used for debt reduction. Funds from operations (FFO) adjusted leverage improved to 3.6x at the end of 2013 compared with 4.4x in 2012.

Fitch expects that Molson's FCF, calculated as cash flow from operations (CFFO) less capital expenditures and dividends should be in excess of $400 million in 2014 and primarily be used for debt reduction. Consequently, leverage should be in the 2.4x - 2.5x range at the end of 2014.

Sufficient Liquidity:

In addition to $442 million of cash at the end of 2013, 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 support the company's $950 million commercial paper program. Molson Coors commercial paper borrowings were $380 million at year-end. The credit facilities have a leverage ratio test that limits total consolidated debt to consolidated EBITDA of 3.50:1.00. As of Dec. 31, 2013, Molson Coors indicated that it was in compliance with its debt covenants. Molson Coors has material maturities in the next three years include CAD900 million due in 2015.

In recognition of the improved financial operating profile, Molson Coors announced a 16% increase in its annual dividend to $1.48 per share. In addition, the firm adopted a formal dividend payout target of 18%-22% of prior year underlying EBITDA. Over the longer term, Fitch anticipates the company will gravitate to the higher end of the payout range. In addition, as Molson Coors returns closer to its net leverage target of less than 2x, absent bolt-on type acquisition opportunities, the company could consider resuming share repurchases. Molson Coors did not repurchase shares in 2012 or 2013 following the acquisition. The current share repurchase program expires in 2014.

RATING SENSITIVITIES:

A positive rating action is not anticipated in the near term as the company's credit measures are slightly weak for the rating category but much improved from a year ago. If Molson Coors continues delevering as expected, while maintaining its cash flow profile and is committed to maintaining leverage (total debt to operating EBITDA plus equity income) in the low 2.0x, a positive rating action could be considered. However, Fitch believes the company would consider increasing shareholder returns once back to its targeted net leverage range.

A negative rating action could result from a failure to reduce debt and leverage (total debt to operating EBITDA plus equity income) 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.

Fitch has affirmed the following ratings:

Molson Coors Brewing Company (Parent)

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

--Short-term IDR at 'F2';

--Commercial paper rating of 'F2'

--Bank credit facility rating at 'BBB';

--Senior unsecured debt rating at 'BBB'.

Molson Coors Capital Finance ULC

--Long-term IDR at 'BBB';

--Senior unsecured debt rating at 'BBB'

Molson Coors International LP

--Long-term IDR at 'BBB';

--Senior unsecured debt rating at 'BBB'.

Molson Coors Holdco, Inc.;

--Long-term IDR at 'BBB'.

Molson Coors European Finance Company

--Long-term IDR at 'BBB'.

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

The following rating has been withdrawn:

Molson Coors Holdco, Inc.

--Long-term IDR of 'BBB'.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823160

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Contacts

Fitch Ratings
Primary Analyst
William Densmore, +1-312-368-3125
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Wesley E. Moultrie, II, CPA, +1-312-368-3186
Managing Director
or
Committee Chairperson
Michael Zbinovec, +1-312-368-3164
Senior Director
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
William Densmore, +1-312-368-3125
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Wesley E. Moultrie, II, CPA, +1-312-368-3186
Managing Director
or
Committee Chairperson
Michael Zbinovec, +1-312-368-3164
Senior Director
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com