CHICAGO--(BUSINESS WIRE)--Fitch Ratings' 'A/F1' ratings for Brown-Forman Corporation (Brown-Forman) are unaffected by the company's increase of its commercial paper (CP) program by $200 million to $1.2 billion. The Rating Outlook is Negative.
Brown-Forman maintains two facilities, an $800 million five-year credit facility that matures in November 2018 and a 364-day $400 million revolving facility. The 364-day facility was recently added to further support liquidity in light of the company's Fiscal 2017 $1 billion share repurchase program and its pending acquisition of The BenRiach Distillery Company. These facilities fully backstop Brown-Forman's $1.2 billion CP program.
CP borrowings were $506 million for the quarter ended Jan. 31, 2016, which leaves total available capacity of $694 million, pro forma for the new 364-day revolver. The credit facilities include an interest-coverage financial maintenance covenant of 3x. Brown-Forman maintains a very manageable maturity profile with $250 million coming due in 2018.
The Negative Outlook reflects the continued erosion of Brown-Forman's credit profile driven primarily by an aggressive financial policy towards debt-funded share repurchases. It also reflects expectations that Brown-Forman will fully complete its $1 billion share repurchase program in fiscal 2017 combined with the increased debt associated with the acquisition of The BenRiach Distillery Company. Fitch views the acquisition as highly complementary as it will fill a gap in Brown-Forman's aged spirits portfolio. However, Fitch expects leverage will increase to 1.6x for FY2016 and approximately 2.1x in FY2017 before moderating in FY2018 to slightly less than 2x due to growth in EBITDA. This compares to debt/EBITDA in the 1x-1.1x range during the last few years.
Brown-Forman's ratings are supported by sizeable operating earnings and consistent cash flow generation derived from the strong and competitive brand portfolio of one of the largest worldwide spirits companies. Major contributors to Brown-Forman's operating earnings include its Jack Daniel's franchise, which is the fourth-largest premium spirits brand and the largest selling American whiskey brand in the world, and its highly successful line extensions, Tennessee Honey and Tennessee Fire.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a positive rating action include:
Positive rating actions are not anticipated in the intermediate term given the expected increase in leverage and the Negative Outlook. Over the longer term, a positive rating action would be based on continued strong operating performance driven by the Jack Daniel's Brand Family combined with:
--Decreased leverage such that total debt-to-operating EBITDA is below 1.5x;
--FFO adjusted leverage in the low 2x range on a sustained basis.
Any potential ratings upgrade would be limited given Brown-Forman's dependence on the Jack Daniel's franchise.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Total Debt-to-EBITDA sustained above 2x;
--FFO adjusted leverage sustained above 3x;
--FCF margin sustained below 5%;
--A material leveraging transaction;
--Further aggressive shareholder-based initiatives;
--A significant and sustained loss of market share for the Jack Daniel's brand.
Fitch currently rates Brown-Forman as follows:
--Long-term Issuer Default rating (IDR) 'A';
--Short-term IDR 'F1';
--Commercial paper 'F1';
--Senior unsecured notes 'A';
--Bank credit facility 'A'.
Date of Relevant Rating Committee: April 27, 2016
Additional information is available on www.fitchratings.com.
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