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

CHICAGO--()--Fitch Ratings has affirmed the Issuer Default Rating and corresponding issue-level ratings of Molson Coors Brewing Company (Molson Coors) and its related entities at 'BBB' and 'BBB/F2'. The Rating Outlook is Stable. A complete list of rating actions is provided at the end of this release. Molson Coors had approximately $3.2 billion of total debt at the end of 2014.

KEY RATING DRIVERS:

Market Position

Molson Coors' ratings are supported by its well-known respected brands and strong-to-competitive market share positions in primarily large profitable mature beer markets. Molson Coors brands are some of the most recognizable and valuable in the world. Molson Coors has the second leading market share in the U.S. (through its MillerCoors LLC joint venture [JV]) with Coors Light and Miller Lite, respectively the number 2 and number 4 best-selling brands. In Canada, Molson Coors has the number 2 and number 3 brands - Coors Light and Molson Canadian - and the number 1 brand in the U.K., Carling. In Central Europe, the company has top-three market share positions across the regions where Molson Coors operates.

Molson Coors also has increasing exposure to the faster growing craft beer and above-premium 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. Demand for mainstream lager beer in the U.S., despite the continuation of the economic recovery, could remain under pressure as the millennial generation shifts preferences into spirits and wine. The MillerCoors above-premium portfolio grew high single digits in 2014 and includes Blue Moon, the largest craft beer brand in the U.S.

Molson Coors' market share gives the firm appropriate scale to better leverage fixed costs and take advantage of on-going cost efficiencies that provide substantial flexibility for brand reinvestment to bolster their competitive position, although profitability is less than peers. Molson Coors remains at a structural disadvantage in the U.S. relative to the greater scale of Anheuser Busch InBev NV/SA. The MillerCoors current JV ownership structure limits additional meaningful synergy opportunities in the areas of procurement, supply chain, distribution and back office.

Challenging Operating Environment:

Molson Coors' ratings further consider the difficult and soft global operating environment illustrated by slight 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, lackluster economic conditions, termination of certain JVs, and weak consumer spending. Molson Coors' sales to retailers (STRs) of beer in 2014 declined 2.5% and 4.7% in the U.S. and Canada, respectively. Europe sales volume decreased 0.3% in 2014, as demand and effects from flooding were partially offset by improved performance in the U.K., as well as several Central European regions.

MillerCoors JV Performance

Equity income in MillerCoors increased 4.3% to $562 million driven by pricing, mix and cost reduction. MillerCoors generated cost savings of approximately $143 million along with a 2.8% increase in domestic net revenue per barrel. The cost savings and price increases helped to offset the volume declines across MillerCoors' premium light, premium, and value portfolios. This included a low single-digit decrease in the largest segment in the U.S., premium light, which is an improvement from the mid-single-digit decline in 2013.

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. The lack of a long-term recovery for this key demographic segment is leading to headwinds as GDP, consumer sentiment and unemployment levels return to normalized levels. Overall, volumes in the U.S. beer industry have declined in five of the six past years. Growth in top-line revenue will focus on innovation, above-premium share and repositioned core brands.

Good Liquidity, FCF Headwinds for 2015

In addition to $625 million in cash at the end of 2014 that is primarily held offshore, Molson Coors has a $750 million five-year multicurrency credit facility that expires in 2019. The credit facility supports the company's $750 million commercial paper (CP) program. Molson Coors did not have any CP borrowings at year-end. Molson Coors' maturities during the next three years are CAD900 million unsecured notes due in 2015 and $730 million due in 2017 including CAD500 unsecured notes and $300 million unsecured notes. Fitch expects Molson Coors to target longer-term cash balances in the range of $250 million to $300 million.

FCF (calculated as cash flow from operations [CFFO] less capital expenditures, pension contributions and dividends) for 2014 was substantially ahead of Fitch's expectations of $735 million, driven by several factors including the timing of working capital payments. FCF expectations for 2015 are for less than $50 million due to pension plan contributions of $260 million-$270 million, increased capital investment, higher cash taxes, and foreign exchange pressure. Fitch views Molson Coors longer-term normalized FCF generation to be at least $350 million.

Molson Coors has changed its capital allocation focus by targeting increased shareholder distributions, since the company has reduced leverage to pre-StarBev levels. For 2012 and 2013, Molson Coors did not increase the dividend or repurchase any shares. Since 2013, Molson Coors has increased its annual dividend by 28% to $1.64 per share which represents a dividend payout of 21% of 2014 underlying EBITDA, within management guidance of 18% to 22%. In 2015, Molson Coors announced a four-year $1 billion share repurchase program that will be weighted toward the back half of the period as free cash generation increases.

Improved Credit Metrics, Deleveraging Complete

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 2014, Molson Coors leverage (total debt-to-operating EBITDA plus equity income of $562 million) was 2.3x, modestly ahead of 2014 expectations of 2.4x-2.5x. EBITDA-to-interest was 9.2x. This compares to leverage of 3.8x and EBITDA-to-interest of 6.2x at the end of 2012. Fitch does not expect any further debt reduction as Molson Coors has reduced total debt by $1.5 billion during the past two years with leverage within Molson Coors' targeted range.

Funds from operations (FFO) adjusted leverage improved to 2.5x at the end of 2014 compared with 4.4x in 2012. Given the previously mentioned FCF headwinds for 2015, Fitch expects FFO adjusted leverage will weaken to the mid-to-high-3x range by year-end before strengthening to less than 3x in 2016.

KEY ASSUMPTIONS

Additional key assumptions within the rating case for the issuer include:

--FCF of less than $50 million (including pension contribution and dividend) in 2015 due to a material increase in cash taxes, foreign exchange headwinds of approximately $75 million and expected pension plan contributions of $260 million-$270 million;

--The forecast does not assume any further debt reduction;

--FFO adjusted leverage will increase to 3.7x (including UK pension contribution) before decreasing back below 3x in 2016;

--Cash levels will reduce over the long term to $250 million-$300 million with the focus on the PACC model.

--EBITDA margins will remain stable at current levels.

RATING SENSITIVITIES:

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

--Sustained FFO adjusted gross leverage under 3x;

--Demonstrated ability to sustain FCF margin above 5%, adjusted for MillerCoors;

--FFO margin in the 13% range adjusted for MillerCoors;

--EBITDAR margin sustained in the low 20% range adjusted for MillerCoors;

--Relatively stable volume and pricing trends for their brands in their largest markets, the U.S., UK and Canada, driven by key flagship brands with growing contributions from above-premium brands.

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

--Increased debt and leverage such that FFO adjusted leverage is maintained above 4x 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 due to heightened competition;

--A large debt-funded acquisition of the remaining 58% stake in the MillerCoors joint venture. Fitch views a potential MillerCoors acquisition as event risk;

--A change in financial policy that would result in debt-funded shareholder returns through share repurchases and increased dividends.

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 at 'F2';

--Bank credit facility rating at 'BBB';

--Senior unsecured debt rating at 'BBB'.

Molson Coors Capital Finance ULC

--Senior guaranteed unsecured debt at 'BBB'.

Molson Coors International LP

--Senior guaranteed unsecured debt at 'BBB'.

Molson Coors European Finance Company

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

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 2014);

--'Parent and Subsidiary Rating Linkage' (May 2014).

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981110

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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
Carla Norfleet Taylor, CFA, +1-312-368-3194
Senior Director
or
Committee Chairperson
Mark Sadeghian, +1-312-368-2090
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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
Carla Norfleet Taylor, CFA, +1-312-368-3194
Senior Director
or
Committee Chairperson
Mark Sadeghian, +1-312-368-2090
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com