DBRS Morningstar Changes Trend on Molson Coors Beverage Company, Inc. to Negative from Stable; Confirms Ratings

DBRS Limited (DBRS Morningstar) changed the trend on Molson Coors Beverage Company’s (Molson Coors or the Company; formerly Molson Coors Brewing Company) ratings to Negative from Stable. DBRS Morningstar also confirmed the Issuer Rating and Senior Unsecured Debt rating at BBB (low) and confirmed the Commercial Paper rating at R-2 (low). Additionally, DBRS Morningstar changed the trend on Molson Coors International LP’s Senior Unsecured Notes to Negative from Stable and confirmed the rating at BBB (low). These rating actions reflect DBRS Morningstar’s view that the Coronavirus Disease (COVID-19) pandemic and the macroeconomic aftereffects, combined with an already challenging operating environment, will have a material negative impact on Molson Coors’ earnings profile and will delay its deleveraging plan.

DBRS Morningstar confirmed Molson Coors’ ratings with a Stable trend on September 4, 2019; however, at that time, DBRS Morningstar noted that Molson Coors continues to face significant near-to-medium term industry headwinds, with volume pressure in the Company’s core markets expected to persist. DBRS Morningstar also noted that if Molson fails to return credit metrics to a level considered more acceptable for the current BBB (low) rating (i.e., lease-adjusted debt-to-EBITDA below 4.0 times (x)), from 4.27x at the end of the last 12 months (LTM) ended June 30, 2019, as a result of weaker-than-expected operating performance and/or more aggressive-than-expected financial management, a negative rating action could result.

Since then, Molson Coors continued to face a challenging operating environment, with beer volumes in all of its core markets experiencing further declines during the second half of 2019 (H2 2019) and the first quarter of 2020 (Q1 2020). Molson Coors’ sales dropped materially in Q1 2020 ((8.7% year over year), primarily as a result of closures of on-trade channels, which contributed 23% to Molson’s net sales in F2019. As such, revenues declined to $10.4 billion in the LTM ended Q1 2020 compared with $10.7 billion in the LTM ended Q1 2019; EBITDA margins declined to 20.6% from 21.3% during the same period. EBITDA decreased by 8.5% to $2.1 billion during the LTM ended Q1 F2020 from $2.3 billion during the LTM ended Q1 F2019. As such, despite net debt repayments of approximately $106 million since the end of Q2 2019 (including higher drawdown under the revolving credit facility in Q1 F2020), credit metrics did not return to a level more acceptable for the current BBB (low) rating (i.e., lease-adjusted debt-to-EBITDA below 4.0x but rather deteriorated with lease-adjusted debt-to-EBITDAR weakening to 4.48x during the LTM ended Q1 F2020.

DBRS Morningstar believes that Molson Coors’ earnings and financial profile will continue to weaken over the near to medium term, based on DBRS Morningstar’s expectation of continued volume declines and earnings loss amid the coronavirus pandemic. Over the near term, DBRS Morningstar expects volumes in the on-trade channels to be severely affected due to restrictions on restaurants, bars, and public events across Molson Coors’ core markets. Additionally, DBRS Morningstar believes that even when stay-at-home orders and restrictions on restaurants, bars, and public events are eased or lifted, a return to consumers' pre-coronavirus going out behaviour will be drawn out, whether it is as a result of consumers' continued practice of social distancing or as a result of curtailed consumer spending in a recessionary macroeconomic environment. While there may be a temporary increase in off-trade sale volumes, DBRS Morningstar does not expect this to be sufficient to offset the significant decline in the on-trade consumption. EBITDA margins are expected to continue to be pressured due to volume deleveraging. As such, DBRS Morningstar expects cash flow from operations to decline in line with the operating income, resulting in limited free-cash-flow generation for debt reduction. While the Company could use capital conserving measures to defend credit metrics through debt reduction, changing the trend to Stable would be more influenced by stabilization and meaningful recovery in the operating income rather than debt reduction. However, if key credit metrics remain pressured because of a continued decline in operating income, Molson Coors’ ratings could be downgraded.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

DBRS Morningstar notes that the above press release was amended on June 30, 2020, to include links to all of the principal methodologies, and on October 2, 2020, to include a description of how each methodology was applied. The amendments were minor and would not impact the understanding of the reader.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Consumer Products Industry (August 15, 2019), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 10, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships (November 25, 2019), and DBRS Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, “Rating Companies in the Consumer Products Industry (August 15, 2019) was the primary rating methodology applied to determine the ratings assigned to Molson Coors. “DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships” (November 25, 2019) and “DBRS Criteria: Guarantees and Other Forms of Support” (January 22, 2020) were applied to assess the corporate structure of Molson Coors and to determine ratings of Senior Unsecured notes issued by subsidiary Molson Coors International LP. “DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers” (March 10, 2020) was applied to ensure that the provided liquidity in support of the Commercial Paper rating was consistent with the DBRS Morningstar criteria.

The last rating action on this transaction took place on September 4, 2019, DBRS Morningstar confirmed all ratings with Stable trends.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Vikas Munjal, Assistant Vice President, Global Corporates
Rating Committee Chair: Anil Passi, Managing Director, Global Corporates
Initial Rating Date: March 21, 2005

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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-- Rating Companies in the Consumer Products Industry (August 15, 2019)
https://www.dbrsmorningstar.com/research/349381/rating-companies-in-the-consumer-products-industry
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 10, 2020)
https://www.dbrsmorningstar.com/research/357788/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships (November 25, 2019)
https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships
-- DBRS Criteria: Guarantees and Other Forms of Support (January 22, 2020)
https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support