MOODY'S ASSIGNS Baa1 TO GUARANTEED SENIOR UNSECURED LONG-TERM DEBT OF FBG FINANCE LIMITED
TOKYO, 11-09-95 -- Moody's Investors Service assigned a Baa1 senior unsecured long-term debt rating to FBG Finance Limited's approximately US$200 million notes, sold under Rule 144A. The rating is based on the unconditional guarantee of Foster's Brewing Group Limited (Foster's). The rating recognizes both the credit strength of Foster's operating subsidiaries and the structurally subordinated nature of this unsecured debt relative to the operating subsidiaries' indebtedness. The rating is based on the stable and predictable cash flow from Foster's brewing subsidiaries and its improved financial flexibility. It also incorporates its explicit appetite for acquisitions, limited growth potential in the Australian and Canadian beer markets, and unimpressive earnings outlook for its 50%-owned U.K. pub estate joint venture.
These securities are to be sold in a privately negotiated transaction without registration under the Securities Act of 1993 (the Act) under circumstances reasonably designed to preclude a distribution thereof in violation of the Act. The issuance has been designed to permit resale under Rule 144A. This rating was assigned on 10/30/1995, with a letter to the issuer and investment banker. This is the first time that Moody's has rated the debt of the company.
It is estimated that Foster's generates over 80% of earnings before tax and interest (EBIT) from its wholly-owned subsidiary, Carlton and United Breweries Limited (CUB). CUB has more than 50% share of the duopolistic Australian beer market, supported by its strong brand portfolio that includes the nation's top two selling packaged beer brands. While the market's overall demand is expected to remain flat, Moody's expects CUB to continue to improve cost efficiencies and maintain solid cash flows.
An estimated 20% of Foster's EBIT is generated by its Canadian brewing operation, conducted by Molson Breweries (Molson). Molson is a partnership, of which Foster's and The Molson Companies Limited own 40% each, and Miller Brewing Company owns the remaining 20%. Molson's dominant position in a duopolistic market, its strong brand portfolio, and its efficiency improvement measures will continue to support the company's stable cash flows, despite increasing challenges in the market. These challenges include stagnant demand, heightened competition fueled by increased imports, and continued growth in the popular (lower) price category.
Given the limited growth opportunities within Foster's main businesses, the company has expressed its willingness to pursue growth through acquisitions, most likely associated with beer or other beverage businesses. The company sold the brewing assets of Courage, the U.K. brewer, in August 1995. Moody's believes that approximately A$900 million proceeds from the sale, which were used to reduce debt, will eventually be leveraged, in part or in whole, to finance the upcoming acquisitions. In this respect, Moody's expects the company to accept higher debt levels if the right opportunity arises. Yet, the rating agency believes that Foster's capital structure is unlikely to deteriorate significantly from the period immediately prior to the sale of Courage, when its total debt to capitalization was roughly 37%.
Approximately 10% of Foster's consolidated assets as of fiscal year ended June 1995 is tied to its investments in a 50/50 joint venture with Grand Metropolitan, Inntreprenuer Estates Limited (IEL), which operates nearly 4,330 pubs in the U.K. Although restructuring has helped IEL to improve its performance after years of losses, Moody's believes that a continued difficult operating environment will limit IEL's pace of recovery, and consequently, cash returns to Foster's are unlikely over the mid-term. Provisions amounting to more than 40% of gross investment in IEL are reserved on Foster's books. However, further writedowns may be needed, given that Foster's net investment is still higher than its 50% share of the underlying net assets of IEL, coupled with the sluggish market outlook. Moody's believes that Foster's may ultimately withdraw from the business if the right opportunity arises.
Foster's has improved its financial profile during the past five years by divesting its non-core, low-performing assets to reduce debt. Looking forward, Moody's believes that the company's emphasis on acquired and organic growth -- in particular, its expansion into operations with longer time to generate cash returns and with higher operating risk -- will limit further improvements in its debt protection measurements. In addition, potential future income tax benefits relating to accumulated losses will likely diminish by fiscal year 1997, increasing its tax burden thereafter.
Foster's Brewing Group Limited, headquartered in Melbourne, Australia, conducts brewing operations in Australia, Canada, and China through its subsidiaries and joint ventures. It also owns pub estates in the U.K. through a joint venture. FBG Finance Limited, a wholly-owned subsidiary of Foster's, is a financing company for Foster's and its controlled entities.
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