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Rating Action:

Moody's affirms Suntory Holdings' Baa2 ratings, changes outlook to positive

 The document has been translated in other languages

27 Jun 2022

Tokyo, June 27, 2022 -- Moody's Japan K. K. has affirmed Suntory Holdings Limited's (Suntory Holdings) Baa2 issuer rating and senior unsecured rating.

Moody's has also affirmed the Baa2 backed senior unsecured rating of Beam Suntory Inc., a wholly owned subsidiary. The notes are guaranteed by Suntory Holdings.

At the same time, Moody's has changed the rating outlook to positive from stable for Suntory Holdings and Beam Suntory Inc.

"The positive outlook reflects Suntory Holdings' improved credit quality, including a quicker-than-expected turnaround in profits coming out of the pandemic and a reduction in leverage, which we expect to decline below pre-pandemic levels," says Dean Enjo, a Moody's Vice President and Senior Analyst.

RATINGS RATIONALE

Suntory Holdings' fundamentals have rebounded faster than Moody's expectations with 2021 operating profit approaching pre-pandemic levels. This rebound was driven by resilient demand for its lucrative whiskey products during the pandemic and a quick turnaround at subsidiary Suntory Beverage & Food Limited (SBF), where profits in 2021 exceeded pre-pandemic levels. With price hikes already rolled out overseas and to be done in Japan later in 2022, combined with a further recovery in its domestic businesses, Suntory Holdings' group profit would exceed pre-pandemic levels over the next 12 to 18 months.

Since the JPY1.6 trillion acquisition of Beam Suntory in 2014, Suntory Holdings has reduced debt annually, except in 2020 during the pandemic. Debt reduction resumed in 2021 such that debt has dropped around a quarter since the Beam acquisition. Leverage, as measured by gross debt to EBITDA, rose to above 6x in 2014 immediately after the Beam acquisition, but now is at the mid-3x range as of 2021. With the company's incremental growth in EBITDA and continuing reduction in debt, Moody's projects leverage will decline to the low-3x range over the next 12 to 18 months.

Suntory Holdings has been generating stable cash flow from operations of about JPY250 billion-JPY300 billion annually, even during the pandemic. Its largest subsidiary, 59%-owned SBF, is a core operating company that generates half of Suntory Holdings' consolidated EBITDA. Much of SBF's cash flow is up-streamed to Suntory Holdings, a non-operating holding company. Most of the remaining consolidated EBITDA of Suntory Holdings comes from its Beam Suntory subsidiary, which strengthens the company's spirits brands, including its Jim Beam whiskeys and other premium spirits brands.

In terms of corporate governance, Suntory Holdings is one of the largest non-public companies in Japan, with close to 90% of shares controlled by the founding family. Its private status limits the company's funding sources to bank loans and the debt markets for external financing. Its dividend payout, however, has remained low over many years, which has resulted in free cash flow and organic credit accretion.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The positive outlook on Suntory Holdings reflects Moody's expectation that the company's deleveraging will continue under its current financial policy and that the operating environment will continue to improve, notably in the Japanese market.  Suntory Holdings' ratings and outlook could be affected by changes in those of SBF.

Moody's could upgrade the ratings if Suntory Holdings maintains its operating cash flow and reduces its financial leverage. Specifically, the rating agency would consider upgrading Suntory Holdings' ratings if the company sustains debt/EBITDA below 3.5x and retained cash flow/net debt in the upper 20% range.

A downgrade is unlikely given the positive outlook. However, Moody's could change the rating outlook to stable if Suntory Holdings' operating performance softens; its financial policy becomes more shareholder friendly; or the group engages in large debt-financed transactions, such that the company sustains debt/EBITDA in the upper 3x range or  retained cash flow/net debt around 20%.

The principal methodology used in these ratings was Alcoholic Beverages (Japanese) published in January 2022 and available at https://ratings.moodys.com/api/rmc-documents/360915. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Suntory Holdings Limited, headquartered in Osaka, is a holding company that is a leading producer of alcoholic and soft beverages in Japan.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Dean Enjo
Vice President - Senior Analyst
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Mihoko Manabe
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

No Related Data.
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