Fitch Affirms Beam's IDRs at 'BBB/F2'; Outlook Stable
CHICAGO -- April 23, 2013
Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and the debt
ratings of Beam, Inc. (Beam) as follows:
--Long-Term IDR at 'BBB' ;
--Bank credit facility at 'BBB';
--Senior unsecured notes and debentures at 'BBB' ;
--Short-Term IDR at 'F2' ;
--Commercial Paper (CP) at 'F2'.
The Rating Outlook is Stable.
Key Rating Drivers
Beam's ratings are supported by the limited volatility in revenues and
operating income exhibited by Beam's operations. This is due to its position
as the fourth largest and second largest premium spirits company in the world
and U.S., respectively. Approximately 60% of revenue and operating income
comes from the growing North American operations. Beam's largest brands (over
$100 million in sales) include Jim Beam, Marker's Mark, Sauza, Canadian Club,
Courvoisier, and Teacher's.
Beam's portfolio skews towards bourbons and whiskeys, which Fitch believes is
a company strength. Given the aging process and inventory investments
required, premium brown spirits are protected from value competition and new
entrants while vodka has been hit by both in recent years. Brown spirits have
also recently taken share from clear spirits with favorable demand trends
driven by flavored and higher-end whiskey and bourbon products. Industry
demand trends should remain strong that when coupled with Beam's portfolio
could allow the company to grow at above average rates. Revenue growth of 6%
was driven by both volume and price gains in 2012.
As a result, Beam's favorable operational trends drove its consistent and
meaningful cash flow generation. In 2012, after adjusting for $84 million
associated with discontinued operations, Beam generated approximately $200
million in FCF after dividends. Fitch expects Beam to generate at least $175
million of FCF in 2013 on a normalized basis after capital expenditures and
dividends. Beam must continue making significant investments to strengthen
Beam's competitive position and long-term growth potential in several key
areas including the broad portfolio of its premium brands anchored by its
Beam's leverage metric is declining and almost back in line for a typical
'BBB' spirits company. For the year ended 2012, total debt to operating
EBITDA, pro forma for the debt repayment of Euro219 million in January 2013,
was 3.0 times (x) down from 3.4x following the $605 million acquisition of
Pinnacle in April 2012. Beam's long-term leverage target of net debt to EBITDA
is 2.5x. Fitch expects FFO adjusted leverage, which was 3.3x after adjusting
for the debt repayment, and interest coverage (EBITDA/interest expense), which
was 6.8x, will improve going forward.
Beam's liquidity was sufficient given its cash, revolver availability and free
cash generation. As of Dec. 31, 2012, pro forma for the January 2013 debt
repayment, cash was $69 million. Beam has an undrawn $750 million five-year
revolving credit facility which expires in December 2016 with meaningful room
under the covenants. Beam's maturity schedule is very manageable with $181
million remaining in 2013, $326 million in 2014, none in 2015, and $400
million in 2016.
The ratings incorporate an understanding that Beam will engage in small to
medium bolt-on acquisitions. In addition to the Pinnacle acquisition, Beam
purchased Cooley Distillery for $95 million in early 2012 and Skinnygirl in
early 2011. These acquisitions were less than FCF and provide good incremental
growth opportunities. Low calorie mixed drinks provide a platform for health
conscious consumers, and Irish whiskeys have experienced growth similar to
bourbon. Beam should also continue to realize material synergies related to
the Pinnacle acquisition through 2014.
Beam's ratings are not likely to be upgraded in the near term given
management's intention to operate at its current credit protection measures.
Furthermore, continued debt reduction may make the company a more desirable
acquisition target. Fitch believes Beam could consider share repurchase
activity in the absence of acquisition opportunities once the company is back
within its net leverage target of 2.5x.
Positive: Future developments that may, individually or collectively, lead to
positive rating include:
--Beam's ratings are not likely to be upgraded in the near term given periodic
acquisitions that could increase the company leverage beyond the rating
--A leverage decrease to below 2.25x and a commitment to better target credit
statistics could warrant an upgrade, but Fitch does not consider this likely
due to management's leverage target and desire to be 'BBB'.
Negative: Future developments that may, individually or collectively, lead to
negative rating include
--Beam's ratings would be negatively affected by large, debt financed share
repurchases and/or acquisitions which would drive leverage on a total debt to
EBITDA basis to the low 3x beyond an 18 - 24 month period of time.
--An acquisition bid from a well-funded but leveraged potential acquirer would
be a credit negative.
--A material, larger than expected payment associated with the on-going
Foreign Corrupt practices Act investigation in India.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Wesley E. Moultrie II, CPA
Brian Bertsch, New York, +1 212-908-0549
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