Fitch Affirms Constellation Brands, Inc.'s Ratings at 'BB+'

CHICAGO--()--Fitch Ratings has affirmed all the ratings for Constellation Brands Inc. (Constellations) at 'BB+'. Constellation had approximately $7.0 billion of debt at Feb. 28, 2014. The Rating Outlook is Stable.

Fitch affirms the following ratings:

Constellation Brands, Inc. (Parent)

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

--Senior unsecured notes at 'BB+';

--$850 million senior secured Revolver Facility at 'BB+';

--$496 million senior secured Term Loan A at 'BB+';

--$245 million senior secured Term Loan A-1 at 'BB+';

--$650 million senior secured Term Loan A-2 at 'BB+.

CIH International S.a.r.l. (Wholly Owned Subsidiary)

--Long-term IDR at 'BB+'.

--$481 million European senior secured Term Loan A at 'BB+';

--$993 million European senior secured Term Loan B at 'BB+'.

The ratings affirmation recognizes Constellation's strong position in the premium beer, wine and spirits business that supports its sizable and stable cash generation. Fitch expects Constellation Brands will produce increasing levels of cash from operations driven principally by expectations for favorable industry demand trends, further leverage on new product development, and the potential for increased efficiencies through cost synergies.

Leverage, while improved from the close of the Modelo acquisition, remains outside of current expectations for the 'BB+' rating category. Constellation should continue to delever as expected to the lower end of the 4x range by fiscal 2015. Fitch also acknowledges on-going execution risk with the brewery expansion given the considerable size and scope of the project. However, overall these risks should be manageable. Fitch believes Constellation may need to support its operations with increased capital investment if current above market growth rates continue which could temper longer-term free cash flow prospects.

KEY RATING DRIVERS

Market Position and Diversification

Constellation is one of the foremost leading producers of premium wine and spirits. The company sold approximately 67 million cases during fiscal year 2014 with leading market share positions in the U.S., Canada and New Zealand. Constellation markets multiple wine brands across all categories and at several price points. Its well-known wine brands include; Robert Mondavi Brands, Clos du Bois, Estancia, Black Box, Arbor Mist, Blackstone, Rex Goliath, Simi, Toasted Head, Mark West, Ravenswood, Franciscan Estate, Ruffino, Wild Horse, Kim Crawford, Mount Veeder, Nobilo, Inniskillin and Jackson-Triggs. Premium spirit brands in its portfolio include SVEDKA Vodka, and Black Velvet Canadian Whisky all of which, according to the company, have a leading position in their respective categories. In the U.S, Constellation sells 14 of the top-selling 100 table wine brands.

Constellation has a perpetual, exclusive license to import, market and sell primarily Grupo Modelo's Mexican beer portfolio in the 50 states of the U.S., the District of Columbia and Guam. According to the company, Constellation's is the largest imported beer company in the U.S. and the third largest beer company overall with a beer portfolio that contains 5 of the top 15 imported beers. Corona Extra is the best-selling imported beer at 102 million cases, significantly higher than the nearest import competitor, Heineken. Corona Light is the leading imported light beer with almost 14 million cases sold.

The Modelo acquisition also substantially increased the diversification of Constellation revenues and cash flows. Constellation generated 49% of revenues and 56% of segment operating income from the beer business since the acquisition closed. Constellation should benefit from the current marketing momentum in the Crown portfolio, the expected favorable growth of imported beer sales in the U.S., and the strength of the Corona brand. As such, Fitch anticipates the beer segment mix to grow during the next several years as Constellation increases earnings and cash flow over the longer term.

Liquidity

Constellation's liquidity was approximately $900 million as of Feb. 28, 2014. The company had a cash position of $64 million and approximately $836 million of availability under its $850 million revolving five-year secured credit facility that matures in 2018. Constellation's accounts receivable securitization facility provides additional borrowing capacity from $190 million up to $290 million. Constellation had $19 million drawn on the facility at the end of the fiscal year 2014.

FCF in FY2014 was $603 million primarily as a result of the strong performance from the beer business. This was at the high end of Fitch's initial expectations for FCF of $500 million - $600 million during the first couple of years following transaction close. Constellation's FCF expectations for fiscal 2015 of $425 million - $500 million are below expectations due to the substantially expanded cost and scope of the Nava, Mexico brewery expansion. The total expansion investment spending is now estimated in the $900 million to $1.1 billion range compared to initial estimates of $500 million for capital over a three year period. FCF in FY2017 is expected to increase materially as the peak spending from the brewery expansion declines.

Upcoming substantial debt maturities in fiscal 2015 include $500 million of 8.375% notes due in December 2014 and $700 million of 7.25% notes in fiscal year 2017. Annual amortization requirements for the next three fiscal years are approximately $73 million in FY 2015, $139 million in FY 2016 and $182 million in FY 2017.

Credit Measures

Fitch estimates that on a pro forma basis, total debt-to-EBITDA for FY2014 was approximately 4.3x - 4.4x. The post-closing adjustment of approximately $558 million due in June 2014 and the high capital investment required for the brewery expansion limits any meaningful debt reduction during fiscal 2015. Consequently, cash flow growth is expected to drive further leverage improvement to the low 4x range, which was within Fitch's previous expectations for the end of FY2015. Fitch also expects FFO fixed charge coverage to improve to the 3.5x - 3.6x range by the end of FY2015. FFO fixed charge coverage was 2.9x at the end of FY2014 without consideration of a pro forma adjustment.

Covenants

Constellation has material flexibility under its financial covenants for the credit facility. The maximum total leverage covenant is 5.75x until the first anniversary from the closing, then steps down to 5.50x thereafter. The minimum interest coverage covenant is 2.50x. Minimal restrictions exist for the issuance of incremental debt, and restricted payments are generally allowed if leverage as defined by the facility is equal to or less than 4.5x. Mandatory prepayments include amortization payments on the term loans and proceeds from material assets sales unless reinvested within a pre-specified time period.

Recent Operating Performance

During FY2014, Constellation generated $4.9 billion of net sales that included $2 billion of incremental net sales related to the beer business acquisition. The beer segment net sales increased almost 10% while the wine and spirits net sales increased 2% on an organic constant currency basis. Organic shipment volumes increased 4.3% for the fourth quarter to 16.8 million cases and 3.6% for the fiscal year 2014 to 66.5 million cases. Beer shipment volume grew 9.9% for the fourth quarter to 37.7 million cases and 6.9% for the fiscal year 2014 to 182.4 million cases. Constellation's brand building efforts and innovation across its beer, wine and spirits portfolio allowed the company to take share and grow at above market rates. The company expects sales growth in the mid to high single digit range for the beer business and sales growth in the low to mid-single digit range for the wine and spirits category.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--Given the current increase in leverage as a result of the acquisition, an upgrade of Constellation's ratings is not anticipated over the rating horizon. STZ's track record of deleveraging following acquisitions and current commitment to reducing leverage back below 4.0x by early fiscal 2016 was a key rating factor at the time the acquisition closed. While STZ is currently focused on reducing leverage, growing organically and streamlining operations, future bolt-on acquisitions are possible given the interest to improve the overall brand portfolio and efficiencies in its operations.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Expectations that Constellation will sustain leverage above 4.5x following a material debt-financed acquisition.

--Management allocating FCF for other strategic equity-friendly initiatives before reducing leverage back to the low 4x range, which is more in line with expectations for the 'BB+' rating category.

--Sustained FFO fixed charge coverage of less than 3.5x.

--Significant and ongoing deterioration in profitability that adversely affects operating results due to competitive activity.

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 - Effective 12 August 2011 to 8 August 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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Contacts

Fitch Ratings
Primary Analyst:
William Densmore, +1-312-368-3125
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Wesley E. Moultrie II, CPA, +1-312-368-3186
Managing Director
or
Committee Chairperson:
Sean Sexton, +1-312-368-3130
Managing Director
or
Media Relations:
Brian Bertsch, New York, +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 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Wesley E. Moultrie II, CPA, +1-312-368-3186
Managing Director
or
Committee Chairperson:
Sean Sexton, +1-312-368-3130
Managing Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com