Fitch Rates Beam's $500MM Senior Notes Offering 'BBB'
CHICAGO -- June 3, 2013
Fitch Ratings has assigned a 'BBB' rating to Beam Inc.'s (Beam's) $500 million
proposed two tranche senior debt offering of five-year and ten-year notes.
Proceeds from the offering will be used to repurchase a portion of the $1
billion outstanding in higher coupon debt including 6.375% notes due June 15,
2014, 8.625% debentures due November 2021, 7.875% debentures due January 2023,
6.625% debentures due July 2028 and 5.875% notes due January 2036. Beam has
commenced a cash tender offer for all of this debt. Beam will redeem all
6.375% Notes due June 15, 2014, which are not accepted for purchase in the
cash tender offers. Any remaining proceeds from this offering will be used for
general corporate purposes. 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 strength for the company. 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 in 2013 that when coupled with Beam's
portfolio could allow the company to grow at above average rates. Beam expects
the global spirits market will grow by 3% in 2013 with limited opportunity to
increase pricing. Revenue growth of 6% on a comparable basis 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 liquidity was good given its cash, revolver availability and free cash
generation. As of Mar. 31, 2013, cash was $65 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 the company addressing its near-term maturity in 2014
through the cash tender offer. Current maturities include approximately $181
million remaining in 2013, $326 million in 2014, none in 2015, and $400
million in 2016. Beam's cash generation allows the flexibility for an annual
dividend that was $130 million in 2012. In March 2013, Beam increased its
dividend by 10%.
Beam's leverage metric is declining and almost back in line for a typical
'BBB' spirits company. For the first quarter 2013, total debt to operating
EBITDA was 2.8 times (x) down from 3.4x following the $605 million acquisition
of Pinnacle in April 2012 and almost back to pre-Pinnacle acquisition level of
2.5x at the end of 2011. Fitch expects FFO adjusted leverage, which was 3.0x,
and interest coverage (EBITDA/interest expense), which was 7.1x, will improve
The ratings incorporate our assumption that Beam will engage in small to
medium bolt-on acquisitions to increase the depth and breadth of its product
portfolio which should provide good incremental growth opportunities. 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
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.
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.
The India business accounted for approximately 2% of Beam's consolidated net
Beam corporate debt ratings are as follows:
--Long-Term IDR 'BBB' ;
--Bank credit facility 'BBB';
--Senior unsecured notes and debentures 'BBB' ;
--Short-Term IDR 'F2' ;
--Commercial Paper (CP) 'F2'.
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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Bill Densmore, +1 312-368-3125
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Wesley E. Moultrie II, CPA, +1 312-368-3186
Michael Weaver, +1 312-368-3156
Brian Bertsch, +1 212-908-0549
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