OREANDA-NEWS. Fitch Ratings has downgraded the long-term debt ratings at Molson Coors Brewing Company (Molson Coors) and Molson Coors International LP to 'BBB-' from 'BBB' and the short-term ratings at Molson Coors to 'F3' from 'F2'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

The ratings downgrade reflects Fitch's expectation that leverage resulting from Molson Coors $12 billion acquisition of SABMiller plc's (SABMiller) 58% stake in MillerCoors will trend towards the mid-3x range (from a pro forma leverage in excess of 5x at merger close) by 2019 versus Molson Coors's standalone debt to EBITDA of approximately 2.5x in 2015. Molson Coors will issue up to $9.8 billion of debt to finance the transaction. In December 2015, Molson Coors entered into a $3 billion committed term loan agreement. As of March 31, 2016 there were no borrowings under the term loan.

The global regulatory process reviewing Anheuser-Busch InBev's (ABI) acquisition of SABMiller and Molson Coors' acquisition of MillerCoors is currently ongoing and the rating action reflects Fitch's expectations that they both receive the necessary regulatory approval to complete their transactions. Both Molson Coors and ABI management expect completion to take place in the second half of 2016. To date, ABI has obtained clearance in 14 jurisdictions including the European Union (some of which are subject to certain conditions).

KEY RATING DRIVERS

Deleveraging Should Result in Mid-3x Leverage by 2019

The 'BBB-' rating reflects Fitch's confidence regarding Molson Coors' commitment and expected de-leveraging path during the next three years after transaction close. On a pro forma basis, Fitch expects leverage (total debt to EBITDA) in excess of 5x. This compares to Molson Coors leverage of approximately 2.5x (total debt-to-operating EBITDA plus latest 12 months [LTM] equity income) for 2015. Assuming a second half of 2016 close, Fitch expects Molson Coors' leverage to improve to the low-4x range by the end of 2018 and the mid-3x range by 2019 driven largely by debt repayment combined with EBITDA growth in the low-to-mid single digits.

Molson Coors has committed to use its free cash flow (FCF) for debt reduction, with plans to discontinue share repurchases while maintaining the current dividend per share of $1.64. Projected FCF of $900 million to $1 billion in 2017 and 2018 is supported by substantial annual cash tax benefits in excess of $250 million, expected working capital benefits and synergies.

Molson Coors has a good track record of meeting deleveraging expectations following significant acquisitions. The deleveraging following the 2012 StarBev transaction was ahead of Fitch's expectations, thus demonstrating a strong commitment for a disciplined financial policy. The low execution risk with this transaction due to familiarity with the MillerCoors joint venture and the good history on executing cost savings initiatives at both MillerCoors and Molson Coors that have exceeded past expectations should benefit cash generation.

Material Strategic Benefits

The transaction, which will result in combined revenue of $11.2 billion and underlying operating income of $1.6 billion, provides material strategic benefits including improved market position, increased scale to drive better efficiencies, expanded global reach and full ownership control of the U. S. business.

Molson Coors brands are some of the most recognizable and valuable in the world with strong-to-competitive market share positions in primarily large profitable mature beer markets. According to the company, Molson Coors will be the number 2 brewer in the U. S. with approximately 26% total market share including the number 2 and 4 beer brands and the number 1 craft brand with Blue Moon. In Canada, Molson Coors has the number 2 and number 4 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 including five number one positons.

The U. S. market will represent roughly two thirds of total pro forma revenue compared to 48% currently at standalone Molson Coors which will dampen the negative effects from foreign exchange headwinds. The transaction also enables an opportunity for global expansion through the Miller Brand portfolio that increases scale and ability to enter new markets.

Meaningful Synergies, Low Execution Risk

The MillerCoors joint venture ownership structure had limited further meaningful synergy opportunities between MillerCoors and Molson Coors in the areas of procurement, supply chain, shared services, distribution and back office. This has resulted in lower profitability relative to its larger peers with the only clear path for significant synergy opportunity through full ownership.

Molson Coors expects $200 million in annualized synergies by the fourth year post transaction close which Fitch views as achievable. In addition, on-going expected cost savings within the embedded businesses further support margin expansion and ability for Molson Coors to reinvest behind the core brands should help drive future growth in operating profit. Over $1.4 billion of annualized cost savings have been delivered since the formation of Molson Coors in 2005 which includes 42% of MillerCoors annualized cost savings.

Volume Pressure Remains a Concern

Molson Coors has experienced past declines with beer volumes in the company's key developed markets of the U. S., Canada and Europe. The past volume declines are driven by competitive pressures including the shift in consumer preferences, lackluster economic conditions, termination of certain JVs, and weak consumer spending. The demand for mainstream lager beer in the U. S. has been negatively affected by unemployment rates for young, lower income men and as the millennial generation shifts preferences into spirits, wine, Mexican imports and craft beers.

MillerCoors' above-premium portfolio provides an important growth offset to the past structural declines within the economy segment. However, the economy segment (29% of MillerCoors volume mix) remains approximately three times the size of Molson Coors above-premium segment. MillerCoors operating trends have been improving during the past year driven by Miller Lite and Coors Light (57% volume mix) taking share with year-over-year (y-o-y) STR volume trends being flat for the first quarter 2016. With the continued stabilization within the premium light segment, which was the first time in several years, overall STR volume trends have improved at MillerCoors by 190 basis points during the past year to low-single digit declines. Fitch believes Molson Coors will need strong marketing execution and greater investments behind its brands to drive successful innovation, above-premium share and further strengthening of its core brands to offset challenges within the beer industry including competitive pressures, market maturity and slowing craft growth in order to realize further volume improvement during the next 2-3 years.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Transaction closes in the second half of 2016;

--Revenue growth in the low-single digits in 2017 and 2018;

--EBITDA growth in the low-to-mid single digits in 2017 and 2018;

--Annual tax benefits over forecast period in excess of $250 million;

--FCF in the range of $900 million to $1 billion in 2017 and 2018;

--Share repurchases to be discontinued and no dividend increases for at least 24 months following transaction close;

--Pro forma leverage at acquisition close in excess of 5x, declining to the low-4x range by the end of 2018 and mid 3x range by 2019.

RATING SENSITIVITIES

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

--An upgrade is unlikely given the sustained increase in Molson's Coors leverage. In the event the transaction does not close as expected and Molson Coors has issued permanent financing, Fitch believes Molson Coors would repay this debt through the bond indentures special mandatory redemption terms, and the ratings would likely be upgraded by one notch.

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

--The pace of deleveraging is slower than expected for leverage reduction to approximately 4x by 2018 and 3.5x by 2019;

--Material M&A or step-ups in shareholder distributions, including dividend and share repurchases;

--A lack of execution on current synergy initiatives, potential working capital improvements, negative net sales growth, and/or margin erosion due to competitive pressures that adversely affects FCF generation;

--Materially negative share trends for Molson Coors flagship brands in their largest markets (U. S., Canada and U. K.)

LIQUIDITY

Molson Coors has made substantial progress on financing plans to address transaction funding. At March 31, 2016, liquidity was $13.6 billion, comprised of $2.7 billion in cash, $6.8 billion 364-day bridge loan facility, $3 billion committed term loan agreement and full availability on the $750 million revolving multicurrency credit facility. The increase in cash and cash equivalents was due to Molson Coors receiving proceeds of $2.5 billion from its equity offering of 29.9 million shares of Class B common stock. The issuance reduced the commitment on Molson Coors' bridge loan facility to $6.8 billion which was undrawn at the end of the first quarter 2016.

In December 2015, Molson Coors entered into a $3 billion term loan agreement including a $1.5 billion three-year tranche and $1.5 billion five-year tranche. The company currently expects to replace the remaining bridge loan facility with $6.7 billion of permanent long-term financing before completing the pending acquisition.

The credit facility that matures in 2019 supports the company's $750 million commercial paper (CP) program that had no outstandings at the end of the first quarter 2016. Molson Coors' maturities during the next two years are $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.

Molson Coors amended the revolving credit facility during the fourth quarter of 2015 to increase the maximum leverage ratio to 5.75x leverage (debt to EBITDA) effective following the completion of the acquisition. The leverage ratio will decline to 3.75x in the fourth year following the transaction close.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings for Molson Coors:

Molson Coors Brewing Company (Parent)

--Long-Term Issuer Default Rating (IDR) to 'BBB-' from 'BBB';

--Short-Term IDR to 'F3' from 'F2';

--Commercial paper to 'F3' to 'F2';

--Bank credit facility to 'BBB-' from 'BBB';

--Senior unsecured debt to 'BBB-' from 'BBB'.

Molson Coors International LP

--Senior guaranteed unsecured debt to 'BBB-' from 'BBB'.

The Rating Outlook is Stable.