CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Brown-Forman Corporation's $500 million senior unsecured notes offering due 2045. The Rating Outlook is Stable.
The company intends to use the net proceeds from this offering for general corporate purposes, which may include retiring existing indebtedness including commercial paper, acquisitions, repurchases of common stock, dividends, funding pension plan obligations, additions to working capital and capital expenditures.
A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Share Repurchases Exhausts Ratings Flexibility
Brown-Forman's $1 billion debt-financed share repurchase program, if fully executed, is viewed as a credit negative and will severely reduce flexibility in the company's ratings. Leverage is expected to eventually rise to the high end of Fitch's expectations. On a funds from operations (FFO) basis, FFO adjusted leverage and FFO fixed charge coverage were 1.8x and 14.9x at the end of the company's 2015 fiscal year (FY) in April. Fitch now expects FFO leverage to approximate 2.5x for FY2016. Longer term, Fitch expects leverage will remain toward the upper end of rating expectations with the increased focus on shareholder returns.
Strong Anchor Brand, Favorable Demand Trends
Brown-Forman's ratings are supported by the sizeable operating earnings and consistent cash flow generation that is derived from the strong and competitive brand portfolio of one of the largest worldwide spirits companies. Major contributors to Brown-Forman's operating earnings are its Jack Daniel's franchise, which is the fourth-largest premium spirits brand and the largest selling American whiskey brand in the world including its highly successful line extensions, Tennessee Honey, and ready-to-drink beverages. The Jack Daniel's family represents on an annual basis approximately half of the depletions of the company's major brands. Brown-Forman's other major brands are Finlandia Vodka, Southern Comfort Liqueur, Canadian Mist and El Jimador Tequila which experienced some volume pressure during FY2015.
Brown-Forman's spirits portfolio primarily competes in the super premium to premium category and skews toward whiskeys, liqueurs and bourbons. Fitch views this as a competitive strength, because the aging process and inventory investments required are a barrier to entry providing an impediment particularly for value competition. Brown-Forman spirits have taken share from beer and clear spirits with the favorable demand trends driven by flavored and higher-end whiskey and bourbon products.
As such, Brown-Forman has experienced strong category momentum for Jack Daniel's Tennessee Honey which continued to grow depletion volume at 29% during fiscal 2015 to more than 1.4 million cases. Industry demand trends should remain strong for the foreseeable future that when coupled with Brown-Forman's portfolio would allow the company to grow at above average rates for the next several years.
Operating Performance In-line with Expectations
Sales, net of excise taxes, increased 6% to $4.1 billion for the fiscal year ended April 30, 2015. Sales growth on an underlying basis was 6% with growth in volume of 4%, price/mix of 3%, and foreign exchange impact of 3%. Growth in the U.S. and Europe, which represents approximately 74% of net sales, was 8% and 6% respectively on an underlying basis. The Jack Daniel's franchise experienced 7% net depletion volume growth and was the primary contributor to overall sales growth, aided by Brown-Forman's super/ultra-premium whiskey brands that grew underlying net sales by double digits including 30% by Woodford Reserve, a super-premium bourbon brand. El Jimador, Southern Comfort Canadian Mist and Finlandia all experienced declines in the low-to-mid single digits. The weak volume performance varied depending on the brand and represents an area the company must improve on to maintain longer-term expected growth rates.
Underlying operating income, excluding currency, increased 9% to $1,027 million and continued to benefit from volume and distribution changes in France, as well as the nationwide rollout of Jack Daniel's Tennessee Fire in the United States. EBITDA margins for fiscal 2015 increased 150bps to 35.6%. Currency headwinds of middle-single-digits for fiscal year 2015 were much greater than initial expectations (negligible). Fitch expects currency headwinds will weigh on the results in FY2016.
Debt Structure And Liquidity
Brown-Forman maintains a very manageable maturity profile with approximately $250 million coming due in 2016 and $250 million in 2018. The company has an undrawn $800 million five-year credit facility that matures in November 2018, which can be expanded by $400 million. The credit facility is primarily used to support the company's $1 billion commercial paper program. Commercial paper borrowings were $183 million during the year ended April 30, 2015. The credit facility includes an interest coverage financial maintenance covenant of 3.0x.
Brown-Forman cash balances, stable FCF generation and undrawn credit facility provide good liquidity. As of April 30, 2015, Brown-Forman had $370 million of cash with $256 million being held by foreign subsidiaries whose earnings Brown-Forman expects to reinvest indefinitely outside the U.S. FCF for the past 12 months was $231 million. FCF is expected to be at least $200 million in FY2016 before increasing in the following years through organic growth and as capital spending ramps down following capacity investments to maintenance levels of approximately $80 million by fiscal 2018.
In October 2014, Brown-Forman authorized a new stock repurchase program of up to $1.25 billion. Share repurchases totaled $462 million during fiscal 2015 as Brown-Forman completed the previous $250 million share repurchase program authorized in 2013 during 2014. The company currently has $807 million available for additional share repurchases through March 24, 2016.
Brown-Forman purchased all of the shares of Slane Castle Irish Whiskey in June 2015, as well as announced plans to invest $50 million to build a new distillery, construct warehouses, and develop a consumer experience at Slane Castle Estate in Ireland. Given the current momentum behind Irish whiskey, Fitch believes this transaction aligns closely with the company's acquisition strategy to acquire brands opportunistically with growth potential that are complementary to Brown-Forman's current portfolio.
KEY ASSUMPTIONS
Additional key assumptions within Fitch's rating case for the issuer include:
--Reported revenue and operating income growth in the lower-single digits for FY2016;
--Increased debt of approximately $800 million in FY2016 to fund the $1 billion share repurchase program. As a result, Fitch forecasts FFO leverage would increase to approximately 2.5x and adjusted debt to EBITDAR of 1.8x, which is at the upper end of leverage expectations. Expected improvement in leverage following FY2016 would be due to EBITDA growth;
--After FY2016, share repurchase activity would pace with FCF generation;
--EBITDA margin of approximately 34%;
--FCF of at least $200 million for FY2016 with FCF margin of 7%.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a positive rating action include:
--An upgrade is unlikely given higher than expected leverage for FY2016 and Brown-Forman's dependence on the Jack Daniel's franchise.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Increased leverage such that total adjusted debt-to-operating EBITDAR exceeds 2.0x or FFO adjusted leverage exceeds 2.5x on a sustained basis;
--A material leveraging transaction;
--Sustained FCF margin declining to less than 5%;
--A significant and sustained loss of market share for the Jack Daniel's brand.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following rating:
--$500 million senior unsecured notes offering due 2045 'A+'.
Brown-Forman's existing ratings are as follows:
--Long-term Issuer Default rating (IDR) 'A+';
--Senior unsecured notes 'A+';
--Bank credit facility 'A+';
--Short-term IDR 'F1';
--Commercial paper 'F1'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: 25 March 2015
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986919
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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