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Fitch Affirms Constellation Brands, Inc. IDR and Senior Notes at 'BB+'; Outlook Stable



  Fitch Affirms Constellation Brands, Inc. IDR and Senior Notes at 'BB+';
  Outlook Stable

Business Wire

CHICAGO -- April 30, 2013

Fitch Ratings has resolved the Rating Watch Negative status of Constellation
Brands Inc.'s (Constellation) ratings, placed on Watch on Feb. 15, 2013, and
assigned the ratings a Stable Outlook. The action follows the company's
revised agreement that it would acquire Grupo Modelo's Piedras Negras brewery
and perpetual rights to the Corona and Modelo brands in the U.S. for $2.9
billion in addition to the remaining 50% of Crown Imports LLC (Crown), a 50-50
joint venture with Grupo Modelo, it does not own for $1.85 billion. The total
combined purchase price will be $4.75 billion excluding closing adjustment.

Fitch has taken the following rating actions on Constellation Brands Inc. and
related entities:

The following ratings have been affirmed:

Constellation Brands, Inc. (Parent)

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

--Senior unsecured notes at 'BB+'.

--Senior secured credit facility at 'BB+';

--$516 million Term A Facility at 'BB+';

--$247 million Term A-1 Facility at 'BB+';

--$850 million Revolver Facility at 'BB+'.

The following ratings have been assigned:

Constellation Brands, Inc. (Parent)

--$675 million Term A-2 Facility 'BB+'.

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

--Long-term IDR 'BB+'.

Fitch has concurrently assigned the following ratings to the proposed debt
used to partially finance the acquisition:

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

--$500 million European senior secured Term Loan A 'BB+';

--$1,000 million European senior secured Term Loan B 'BB+'.

Constellation Brands, Inc. (Parent)

--$1,550 million senior unsecured notes IDR 'BB+'.

Constellation had approximately $3.3 billion of debt at Feb. 28, 2013. The
Rating Outlook is Stable.

The ratings affirmation of Constellation recognizes leverage will increase
materially outside of Fitch's current expectations for the 'BB+' rating
category. Debt reduction in the first year following the acquisition close
should exceed $500 million due primarily to free cash flow (FCF) generation.
Debt reduction efforts during year two will be muted due to the revolver
drawdown and subsequent repayment through FCF for the purchase price
adjustment of approximately $550 million, although continued deleveraging
should occur primarily through cash flow growth. Capital investment will
remain elevated for a three-year period to increase brewery capacity, thus
becoming self-sufficient from Groupo Modelo. Consequently, leverage is
expected to remain moderately outside of the high end of Fitch's rating
expectations at the end of FY 2015 with leverage in the 4x-4.5x range.

Fitch believes this increased financial risk is mitigated by Constellation's
sizable and stable cash generation and record of commitment toward
deleveraging the past several years. Fitch views Constellation as having
relatively lower business risk in the beer, spirits and wine categories with
increased diversification of revenues through this acquisition. As such, the
beer operations generate approximately 55% of Constellation's pro forma
EBITDA, which compares to approximately 25% prior to the acquisition.

Fitch acknowledges the potential for some transaction risk associated with the
new operations in Mexico. However, overall these risks should be manageable.
This is due to Constellation already managing the distribution rights through
the Crown joint venture, Anheuser-Busch InBev (ABI) supporting the transaction
with a three-year transition services agreement, and the stand-alone nature of
Mexican brewery operations reducing the carve-out risk from Grupo Modelo.
Consequently, Fitch expects Constellation Brands will generate stable to
increasing levels of FCF driven principally by expectations for favorable
industry demand trends, further leverage on new product development, and the
potential for increased efficiencies through cost synergies.

KEY RATING DRIVERS

Market Positions and Diversification:

Constellation is one of the foremost leading producers of premium wine and
spirits 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,
Black Velvet Canadian Whisky and Paul Masson Grande Amber Brandy, 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.

Through its Crown J.V., Constellation has the exclusive right 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. Modelo captures a 7%
market share of the large, highly profitable, albeit mature U.S. Beer market.
The Crown portfolio of brands includes Corona Extra, and according to the
company, it is the best-selling imported beer and the sixth best-selling beer
overall in the industry. Corona Light is the leading imported light beer.

Solidified Beer Position

As a result of the revised agreement discussed above, Constellation will have
total and complete control over all aspects of Modelo brands distributed in
the U.S. and the Crown business for the U.S. market. (ABI will provide a
perpetual and exclusive license to Constellation for the Modelo Brands. The
Piedras Negras brewery fulfills approximately 60% of Crown's current demand,
which will require an expansion of the facility and an incremental investment
of approximately $500 million over the next three years, in order to be able
to supply 100% of Crown's needs for the U.S. marketplace.

Fitch believes there is excellent strategic rationale for the transaction,
given Constellation's expertise in marketing the Crown portfolio, the growth
of imported beer sales in the U.S., and the strength of the Corona brand, and
the high earnings and strong cash flow characteristic of the beer market.
Ownership transition risk should be minimized as ABI and Constellation have
also agreed to a three-year transition services contract to ensure the smooth
transition. The companies claim that the Piedras Negras is a world-class
brewery that is fully self-sufficient, utilizes top-of-the-line technology and
was built to be readily expanded to increase production capacity.

Transaction Financing, Covenants and Guarantees

Constellation indicated that it had fully committed $4.375 billion in bridge
financing to complete the acquisition. Permanent financing is expected to
consist of up to $3.725 billion of senior credit facilities composed of term
loans and senior notes, with the remainder of the funding coming from the
company's existing revolving credit facility, accounts receivable
securitization facility and available cash.

Financial covenants for the credit facility are expected to include a maximum
total leverage covenant of 5.75x until the first anniversary from the closing,
stepping down to 5.50x thereafter and a minimum interest coverage covenant of
2.50x. Most other negative covenants are essentially unchanged from
Constellation's existing credit facility. 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.

Constellation, the U.S. borrower will guarantee the debt of CHI International
S.a.r.l., the European borrower of the $500 million European Term Loan A and
$1,000 million European Term Loan B. The U.S. secured credit facilities will
be secured by 100% of the capital stock of material U.S. subsidiaries and
55%-65% of certain interests of certain of its foreign subsidiaries. The
European debt will be secured by the capital stock of its first-tier
subsidiaries, which will include the Piedras Negras brewery and intellectual
property rights.

Credit Measures and Liquidity

Fitch estimates that on a pro forma basis, total debt-to-EBITDA will be just
over 5.0x. Annual combined FCF is estimated to range between approximately
$500 million-$600 million for the first couple of years after allowing for
incremental capex. For the LTM period ending Feb. 28, 2013, Constellation's
50% share of the Crown cash distribution was approximately $230.2 million.
Debt-to-adjusted EBITDA, including the equity income from Crown, was 3.6x for
the period, and EBITDA plus equity income-to-interest expense was 3.9 x.
Constellation debt reduction after the first year will be slower initially as
Fitch expects the company to fund the post-closing adjustment of approximately
$550 million and the Piedras Negras brewery expansion. The Mexican business
generated an estimated EBITDA of $370 million for the calendar year 2012.

Constellation's liquidity remains adequate as a result of the transaction. As
of Feb. 28, 2013, the company had a cash position of $331 million and
approximately $835 million of availability under its $850 million revolving
five-year secured credit facility that matures in 2018. The company has
minimal maturities in fiscal 2014 and substantial maturities in fiscal 2015
and 2017 of $500 million and $700 million, respectively. Annual amortization
requirements are approximately $42 million and $84 million for the first two
years following transaction close, stepping up to $119 million and $154
million in years three and four, respectively. Fitch expects FCF to further
strengthen during the next couple of years. FCF in FY2013 was $494 million.

Recent Operating Performance

During FY2013, Constellation generated $2.8 billion of net sales, an increase
of 3.3% adjusted for acquisitions. Organic shipment volumes increased 5.3% for
the fourth quarter and 3.3% for the fiscal year 2013 as growth was driven by
the volume increases in Constellation's Focus brands of 11.7% and 7.7% for the
quarter and the year, respectively. Constellation's efforts in innovating and
promoting new product development allowed Constellation to take share during
the past fiscal year. The company expects sales growth in the low to middle
single digit range for the beer business and volume growth of at least at the
same level as the U.S. wine and spirits category.

RATING SENSITIVITIES

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

--Given the increase in leverage as a result of the acquisition, an upgrade of
Constellation's ratings is not anticipated in the near to intermediate term.

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

--Significant and ongoing deterioration in operating results that inhibits a
reduction in leverage back to near the top end of the 3x-4x range within a
24-month period post close of the acquisition.

--Additional material debt-financed acquisitions.

--Management allocating FCF for other strategic equity-friendly initiatives
before reducing leverage back in line with expectations for the 'BB+' rating
category.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790080

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PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
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Contact:

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
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brian.bertsch@fitchratings.com
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