Fitch Ratings has assigned first time ratings to JB y Compania,
S.A. de C.V. (JB) with an initial long-term foreign and local
currency Issuer Default Ratings (IDRs) of 'BBB'. The Rating Outlook
is Stable.
In addition, Fitch has assigned a 'BBB(EXP)' long-term rating to
the company's proposed senior unsecured debt issuance of up to
USD500 million with a 10-year bullet maturity. The proceeds from
the issuance will be used mainly to refinance the company's
existing indebtedness and related costs.
KEY RATING DRIVERS
JB's ratings reflect its solid operating profile backed by
strong brand recognition of Jose Cuervo tequila, the integration
across the supply chain for tequila production, as well as the
relatively stable dynamics of the spirits industry, which is less
subject to economic downturns. These factors have contributed to
the group's strong free cash flow (FCF) generation and have
resulted in a conservative capital structure with a sound liquidity
profile. Negatively, the ratings are constrained by the significant
product concentration in tequila which represents more than 70% of
the overall sales volume, and the exposure to the volatility of
prices of its main raw materials such as oil and sugar.
Leading Market Position; Strong Brand Recognition
JB boasts a strong market position driven by its flagship brand
Jose Cuervo tequila, the No.1 tequila in the world by sales/volume.
JB's subsidiaries grow, produce, bottle and sell Jose Cuervo brand
tequila (among others). Jose Cuervo has the leading position in the
U.S. premium segment with a 66% market share in terms of volume and
a 29% market share in the rest of the world (excluding Mexico). JB
is also the second largest distributor of spirits and liqueurs in
Mexico in terms of volume and value after Diageo and Pernod. JB has
the No.1 or No.2 position in every formal price segment in which it
competes.
Conservative Capital Structure
Fitch expects leverage to approach 2.0x following the
debt-funded acquisition of Bushmills Irish Whiskey (Bushmills) for
USD404 million in February 2015. With the proposed issuance of
USD500 million due in 2025, Fitch estimates JB's gross and net
leverage to have reached 1.7x and 0.9x, respectively. These ratios
are low for the rating category. With the incorporation of
Bushmills these ratios should decline slightly to about 1.5x and
0.8x, respectively, in the next 18 to 24 months. JB's proposed bond
will be the group's only debt and will be guaranteed by the
majority of its subsidiaries.
Solid Operating Profile
Fitch believes that the sale of JB's equity stake in tequila Don
Julio and early termination of the Smirnoff distribution agreement
in Mexico will not have a significant impact on JB's profits as the
consolidation of Bushmills is expected to have a net positive
impact of 333,000 cases. Bushmills is the third most popular Irish
whiskey worldwide in terms of volume and the second in the U.S. As
of June 30, 2014, Bushmills sold 809 thousand nine-liter cases. A
subsidiary of JB sold its 50% equity interest in Don Julio to
Diageo in February 2015 as partial consideration for Bushmills. Don
Julio had been a joint venture between the two companies since
2003. As part of the sale, both parties agreed to early terminate
the distribution of Smirnoff in Mexico in November 2014. The net
effect of these transactions was a payment to Diageo of USD404
million.
The group's operating profile is further supported by the return
of the Jose Cuervo brand back to JB after the end of a distribution
agreement with Diageo in June 2013; this led to an increase in
sales and EBITDA in 2013 of 15% to USD715 million and 23% to USD198
million, respectively. As of Dec. 31, 2014, the group had sales of
USD845 million and EBITDA of USD290 million. JB's EBITDA margin has
steadily improved to 34% at YE 2014 from 26% in 2012.
Strong Liquidity and FCF Generation
JB's liquidity profile is strong as its USD226 million of cash
and equivalents fully covered its total debt of USD68 million as of
Dec. 31, 2014. The company's liquidity position is further
supported by its strong FCF generation, which was USD128 million in
2014. Fitch expects JB to continue to report FCF margins in the
mid-single digits for the next three years as a result of lower
capex and stable dividend payments.
Product Concentration in Tequila
JB's high concentration of earnings from tequila which
represents approximately 72% of sales volume as of Dec. 31, 2014,
plays the largest role in limiting the company's ratings to the
'BBB' category. Tequila will represent about 68% of JB's total
sales volume post-Bushmills consolidation, and whiskey will
contribute 6%. Positively, the acquisition will provide
opportunities to leverage both brands to strengthen the group's
footprint. Bushmills' key markets are the U.S. and Canada (29% of
revenue), Eastern Europe (23%), Western Europe (18%), and the
U.K./Ireland (15%).
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer
include:
--An exchange rate of MXN14.5/USD;
--EBITDA generation converging to the USD320 million/year level
in the near/medium term;
--Capex of around USD33 million in 2015, with average capex of
USD25 million per year for the next three years;
--Fixed dividend payments of USD65 million per year;
--Post-issuance, gross leverage slowly declining to 1.5x and net
leverage to below 0.5x.
RATING SENSITIVITIES
The most likely cause of a downgrade would be a management
decision toward a weaker capital structure. A sustained
deterioration in performance or a large debt-financed acquisition
that significantly increases net leverage to above 2.0x would also
lead to a negative rating action. A positive rating action is not
likely in the near- to medium-term.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983694
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Fitch RatingsPrimary AnalystCristina MaderoAssociate Director+1
312-368-2080Fitch Ratings, Inc.70 West Madison StreetChicago, IL
60602orSecondary AnalystRogelio
GonzalezDirector+52-81-8399-9100orCommittee ChairpersonAlberto
MorenoSenior Director+52-81-8399-9100orMedia Relations:Alyssa
Castelli, +1
212-908-0540alyssa.castelli@fitchratings.comorElizabeth Fogerty, +1
212-908-0526elizabeth.fogerty@fitchratings.com