The following statement was released by the rating agency
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Summary analysis — Anheuser-Busch InBev N.V./S.A. —————- 22-Nov-2012
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CREDIT RATING: A/Stable/A-1 Country: Belgium
Primary SIC: Distilled and
blended liquors
Mult. CUSIP6: 03524A
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Credit Rating History:
Local currency Foreign currency
01-May-2012 A/A-1 A/A-1
19-Apr-2011 A-/A-2 A-/A-2
14-Jul-2008 BBB+/A-2 BBB+/A-2
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Rationale
The ratings on Belgium-based international brewer Anheuser-Busch InBev N.V./S.A. (ABI) reflect Standard & Poor’s Ratings Services’ view of its “excellent” business risk profile and “intermediate” financial risk profile.
We view ABI’s leading market positions, high margins, and broad geographic diversity as supportive of its “excellent” business risk profile. ABI’s adjusted EBITDA margin at the end of June 2012 was 42%; the group’s closest competitors report adjusted EBITDA margins in the low-20s to mid-30s. In the nine months ended Sept. 30, 2012, 46% of reported EBITDA came from North America, 42% from Latin America, 10% from Europe, and 3% from Asia. Minus 1% was attributable to the global export and holding companies division.
We view as a business strength the high quality of earnings in the businesses owned by ABI at the parent level, as well as ABI’s close association with the large and cash-generative subgroup headed by its subsidiary, Brazil-based AmBev – Companhia de Bebidas das Americas (AmBev; A/Stable/–, Brazil national scale brAAA/Stable/–). AmBev, ABI’s most significant non-fully-owned subsidiary, covers Latin America (excluding Mexico), the Caribbean, and Canada.
At the end of June 2012, ABI reported adjusted debt of about $40 billion, which equates to an adjusted debt-to-EBITDA ratio of 2.4x. The ratings incorporate the impact of ABI’s planned acquisition of the stake in Mexican brewer Grupo Modelo that it doesn’t already own.
S&P base-case operating scenario
In our base-case scenario we project that over the next few years ABI will be able to grow its revenues at a mid-single-digit rate annually. In our view, this will be driven by strong demand and a growing taste for premium-brand products in developing regions such as Latin America and Asia, especially as the middle-income population in these regions increases. Demand in these regions should continue to offset weaker demand in developed markets, particularly in Europe where consumer confidence remains low.
We think that ABI will be able to expand its margins modestly over the next few years as a result of its pricing power, which is made possible by strong positioning in its key regions. In Brazil, for example, ABI leads the market with a 69% beer market share (via AmBev) and in the U.S. it leads with 48%. In addition, cost controls and economies of scale should support the group’s margins.
S&P base-case cash flow and capital-structure scenario
Given our base-case operating assumptions, we project that ABI will generate funds from operations (FFO) of between $12 billion and $15 billion annually over the next few years. Assuming capital expenditure (capex) equal to 15%-20% of EBITDA and a dividend payment of about $3 billion in 2013, we project that in 2013 ABI will generate discretionary cash flows of about $6 billion. We have no indication of any share buybacks, therefore we have not incorporated such activity into our projections.
In our projections we have incorporated the acquisition of the portion of Grupo Modelo that ABI doesn’t already own. We estimate that this transaction will add about 0.5x to the adjusted-debt-to-EBITDA ratio. Taking account of this acquisition, we project ABI is sufficiently cash generative to enable it to reduce adjusted leverage to close to 2x by the end of 2013 and below 2x during 2014. Our projection for 2013 is further supported by our understanding that the group remains committed to reaching a net-debt-to-EBITDA ratio of 2x. At the end of June 2012, adjusted debt to EBITDA was 2.4x and adjusted FFO to debt was 30%.
Liquidity
The ‘A-1’ short-term rating reflects our opinion that, over the short term, ABI should have ample internal liquidity, good cash flow characteristics, and significant access to the capital markets. We view ABI’s liquidity as “adequate” under our criteria. This descriptor indicates a sources-to-uses ratio of at least 1.2x.
We forecast that liquidity sources for the next 12 months will include:
— About $3.7 billion of cash and cash equivalents as of the end of June 2012;
— FFO of about $12 billion; and
— About $7.1 billion available under the group’s $8 billion committed credit facilities with maturity in June 2016.
In our view, liquidity uses for the next 12 months include:
— Short-term debt of about $7.6 billion at the end of June 2012;
— Capex of about $3.4 billion; and
— Dividends of about $3 billion.
We have not included the payment for Grupo Modelo as a use of cash as ABI has committed financing to fund this acquisition. Specifically, the group has added $14 billion of additional bank facilities: an $8 billion three-year facility and a $6 billion one-year facility with a one-year extension option.
Of further support to the group’s “adequate” liquidity is:
— Well-spread-out debt maturities. As of end-June 2012, about 39% of the group’s total debt matures in more than five years. In addition, ABI benefits from a degree of currency diversification, with about one-third of the group’s debt denominated in currencies other than the U.S. dollar.
— Lack of financial covenants in the group’s core debt facilities, including the facilities put in place to fund the Modelo acquisition.
— Good access to euro and U.S. dollar capital markets. In July 2012, the group issued $7.5 billion of bonds comprising three-year, five-year, 10-year, and 30-year maturities and in September it issued EUR2,250 million of bonds comprised of five-year, seven-year, and 12-year maturities. These issuances have further enhanced the group’s overall liquidity position, including its debt maturity profile.
Outlook
The stable outlook reflects our opinion that ABI’s strong discretionary cash flow generation will enable it to reduce its adjusted-debt-to-EBITDA ratio to close to 2x by the end of 2013. We anticipate that adjusted FFO to debt will remain above 30% over the medium term. We consider an FFO-to-debt ratio of close to 30%, and an adjusted debt-to-EBITDA ratio of close to 2.0x–equating to a gross debt-to-EBITDA ratio of between 2.0x-2.5x–to be commensurate with the current rating.
We could consider lowering the ratings if increased discretionary spending sees the group not returning to adjusted debt-to-EBITDA of close to 2x by the end of 2013, after the impact of the Modelo acquisition in 2013. Given the unconsolidated nature of the brewing industry, we view further M&A activity within the industry as likely. However, in view of ABI’s stated commitment to the 2.0x net debt to EBITDA leverage target, we currently do not believe that ABI will change its financial policy in any way that would lead us to consider a downgrade.
We estimate that ABI is sufficiently cash generative to enable it to reduce adjusted debt to EBITDA to below 2x in 2014. An upgrade would likely be contingent on the group deleveraging to below 2.0x and also expressing commitment to maintaining this. As such, we view the possibility of an upgrade as unlikely at this stage.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
— Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
— Principles Of Credit Ratings, Feb. 16, 2011
— Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012