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27 Jul 2005
MOODY'S ASSIGNS Baa3/P-3 GUARANTEED RATINGS TO PERNOD RICARD, NEGATIVE OUTLOOK; ALLIED DOMECQ RATINGS DOWNGRADED TO Baa3/P-3, REMAIN ON REVIEW FOR DOWNGRADE
First-time ratings for Pernod Ricard. Around GBP1.8 billion bonds of Allied Domecq affected.
Paris, July 27, 2005 -- Moody's Investors Service today assigned a Baa3 long-term
and a Prime-3 short-term senior unsecured guaranteed issuer
ratings to Pernod Ricard S.A. ("Pernod Ricard"
or "the company"). The outlook on the ratings is negative.
The ratings reflect Pernod Ricard's completed acquisition of Allied
Domecq plc ("Allied Domecq"). As issuer ratings,
they also factor in a package of guarantees equivalent to the guarantees
put in place for the bank loans recently signed by Pernod Ricard to finance
the acquisition of Allied Domecq. This is the first time that Moody's
has assigned ratings to Pernod Ricard.
At the same time Moody's downgraded the long-term unsecured
ratings of Allied Domecq to Baa3 from Baa1 and the short-term ratings
of its Commercial Paper programmes to Prime-3 from Prime-2.
Allied Domecq's ratings remain on review for further possible downgrade
in view of the subordination to which its bonds and Commercial Paper may
be subject in the event that they fail to benefit from a guarantee package
comparable to that put in place on the bank loans.
The Baa3 rating of Pernod Ricard reflects Moody's view that the
company's financial profile will remain constrained for a number
of years as a result of its acquisition of Allied Domecq Group.
However, it also takes into account the expectation that the acquisition
will create a global company focused on alcoholic beverages with a comprehensive
and well balanced portfolio that will be significantly diversified in
terms of both geography and categories, with top global brands likely
to drive strong growth supported by brand equity and expected sustained
marketing support. The Baa3 rating thus reflects the balance between
the strong business profile and the weak metrics, with the assumption
that the company will be able to reduce debt, initially by means
of asset disposals and from 2007 by generating free cash-flow.
The financial profile of Pernod Ricard is assumed to reflect the following
- Allied Domecq has been acquired on 26 July 2005 for a total consideration
of EUR10.7 billion, in addition to the assumption of debt
estimated at around EUR2.7 billion. The financing scheme
for the acquisition includes (i) the disposal of a number of brands to
Fortune Brands (for a consideration of around EUR4.0 billion),
(ii) Pernod Ricard equity (EUR2 billion), (iii) the disposal of
Bushmills (EUR0.3 billion), and (iv) new debt for the remainder.
In addition, Pernod Ricard may also sell Montana brands if Diageo
decides to exercise the call option it has agreed with the company.
- The expected conversion of the company's 'Oceane'
convertible bonds into equity will reduce indebtedness in the near term
by close to EUR500 million.
- A EUR9 billion financing package that has been committed by banks
should ensure sufficient financing and liquidity until 2010, based
on Moody's current estimate.
Before the sale of Montana but after the Oceane conversion and the disposal
of brands to Fortune Brands and the disposal of Bushmills, Moody's
expects net on-balance-sheet debt to amount to around EUR8.6
billion. In addition, Pernod Ricard intends to sell the QSR
businesses, which Moody's assumes should be achieved by June
2006, for an expected consideration in excess of EUR1 billion.
Although Pernod Ricard has identified cost and revenue synergies,
Moody's notes that these will require restructuring expenses in
the first two years following the acquisition in order to enable up to
EUR300 million in annual synergies to be generated by June 2007.
Total free cash-flow generation in the first two years after the
acquisition is expected to be very limited in view of the restructuring
costs and the very gradual realisation of synergies. Only after
2007, when synergies have been achieved, is free cash-flow
expected to be significant, at around EUR450-500 million,
allowing for more rapid debt reduction.
The acceptance of very constrained credit metrics for Pernod Ricard in
the context of the rating category during the period immediately following
the acquisition reflects the very solid operating profitability and the
stable cash-flow generation characteristics of the industry.
It also takes into account the fact that in this industry operations require
a relatively high level of working capital, in particular inventories,
which are assumed to have a stable value and therefore to not be at risk
Pernod Ricard's Baa3 rating is also largely based on Moody's
prospective view that execution risks are moderate and therefore that
acceptable credit metrics for the rating category will be achieved as
planned by June 2008. However, Moody's will monitor
the company's rebuilding of its credit metrics over time.
Although these metrics will initially be stretched, the rating agency
expects Retained Cash-flow (RCF) to net adjusted debt before working
capital to improve to around 11-12% in the year closing
June 2008 after the anticipated synergies have been achieved, which
would position the company well within its category. On the back
of restructuring expenses, RCF will be very low in the first two
years after the acquisition. However, net adjusted debt to
EBITDAR should not exceed 5.4 times after the disposal of QSR and
would be expected to drop to materially below 5 times by June 2008.
The disposal of Montana brands may also contribute to further deleveraging
but is not a condition for the sustainability of the Baa3 rating.
The negative outlook on the Pernod Ricard ratings reflects the following
- Managing the Allied Domecq portfolio in the immediate period
following the acquisition
- The transfer of assets to Fortune Brands
- Reorganising the distribution activities of the merged group
- Restructuring in order to implement expected synergies
- The disposal of QSR
As noted above, Moody's broadly concludes that the execution
risks are moderate and manageable. The rating agency takes particular
comfort from the company's track record following its acquisition
of Seagram's. Nevertheless, in view of the number of
steps to be achieved and the high leverage, the company will have
limited room for manoeuvre. Should it fail to achieve one of these
steps, a rating downgrade would be considered. Furthermore,
as Pernod Ricard will have very limited flexibility over the next two
years, a failure to achieve the expected free cash-flow generation
and credit metrics on the back of weaker than expected operating performance
or new acquisitions would also put pressure on the ratings. On
the other hand, if the various measures are executed as expected
and the generation of synergies appears to be on track, a change
in the outlook to stable would be a likely outcome.
The downgrade of Allied Domecq's senior unsecured ratings reflects
the fact that its acquisition by Pernod Ricard increases financial risk
as a result of the higher leverage, although the new group will
have a stronger business profile. The long-term ratings
are expected to remain on review for further possible downgrade until
such time as Pernod Ricard has made a decision with respect to whether
a guarantee package will be established in favour of the Allied Domecq
bonds. Pernod Ricard's bank facilities benefit from the guarantees
of material subsidiaries defined as those representing individually more
than 10% of group assets (including Allied Domecq assets and its
subsidiaries). In the event that Allied Domecq's bonds and
Commercial paper programmes were to be guaranteed by the same entities
(Pernod Ricard and group's principal subsidiaries), the ratings
would be aligned with the guaranteed issuer ratings of Pernod Ricard.
In the absence of such guarantees, Moody's will consider in
its review, subordination implications for Allied Domecq bond and
CP holders in the context of the overall group corporate legal and debt
structure which could result in a further downgrade of the debt ratings.
The following securities, for which Allied Domecq plc is either
obligor or guarantor, were downgraded to Baa3 from Baa1 and remain
on review for possible downgrade:
- EMTNs: DEM500 million due December 2005; EUR800 million
due April 2006; EUR600 million due June 2009; GBP450 million
due April 2011; GBP250 million due June 2014.
The following Commercial Paper programmes, for which Allied Domecq
plc is guarantor, were downgraded to Prime-3 from Prime-2
and remain on review for possible downgrade:
- USD2.5 billion Global Commercial Paper programme
- French Billet de Tresorerie programme
The following ratings have been assigned to Pernod Ricard S.A.
with negative outlook:
- Senior unsecured guaranteed long-term issuer rating at
- Senior unsecured guaranteed short-term issuer rating at
Pernod Ricard S.A., incorporated in Paris, is
a leading worldwide wine and spirits company with annual sales of EUR3.6
billion in 2004 and pro-forma 2004 annual sales of around EUR5.6
billion proforma for the acquisition of Allied Domecq and expected disposals.
Allied Domecq PLC, headquartered in Bristol, England,
is a leading international wines and spirits company. The company
recorded sales of GBP3.2 billion in the financial year ended August
VP - Senior Credit Officer
European Corporate Finance
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Eric de Bodard
European Corporate Finance
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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