Fitch Ratings has affirmed the ratings of Fortune Brands, Inc. (Fortune). The Rating Outlook is Positive. Please see a full list of ratings at the end of this release.
The affirmation resolves the Rating Watch Evolving that Fitch had placed on Fortune's ratings following the company's announcement on Dec. 8, 2010 that it would separate into three standalone businesses. The ratings assume Fortune completes its current tender offer. The Positive Outlook reflects the company's conservative financial strategy and Fitch's expectation that the company will further reduce debt with free cash flow (FCF) in combination with proceeds from a special dividend from the spin-off of the Home and Security business.
Fortune continues to progress along a positive path as it completes its separation plan and has set a target of net debt to EBITDA of 2.5 times (x) for the year end 2011. Using the net proceeds from the sale of its golf business, Acushnet, Fortune launched a tender for up to an aggregate purchase price of $1 billion of several outstanding notes. The tender was well received and raised to $1.05 billion. Fitch estimates that the company will be able to retire more than $900 million in debt after market premiums and an early tender payment of $30 per $1,000 principal amount of notes by Aug. 24, 2011. On a pro-forma basis excluding the Acushnet and Home and Security operations at June 30, 2011, the tender would bring the company's leverage to just below 4.0x.
Further, it is continuing to plan for a spin-off of the Home and Security business early in the fourth quarter. In conjunction with the spin-off, Fortune expects to receive a special dividend of $500 million. Fitch anticipates Fortune Brands Home and Security, Inc. will enter into a committed bank facility to finance the special dividend. Those proceeds in addition to cash generated by the business will allow for further debt reduction. Fitch expects the combination of all these efforts and the company's commitment to debt reduction and solid investment grade characteristics to result in a marked reduction in leverage by year end.
Fortune's ratings reflect the solid cash flow generation of the Beam spirits business, which has the fourth largest premium market share in the world and the second largest in the U.S. The ratings further consider the company's commitment to investment grade credit metrics. Fitch also weighs the company's historically acquisitive nature and the spirits industry's continuing consolidation.
In order for the company to achieve an upgrade, the proceeds from the spin-off and FCF would need to be used for debt reduction. If debt reduction fails to achieve credit measures commensurate with a 'BBB' distilled spirits company, a Stable Outlook is likely. Regardless of the completion of the spin-off of Home and Security, leverage is expected to be below 3.5x. A negative rating action could occur if proceeds from the special dividend are used for shareholder friendly actions or management becomes financially aggressive.
Fortune Brands, Inc., the primary issuer of the company's debt, is expected to consist solely of its spirits business after the separation is completed. The distilled spirits business will be renamed Beam Inc., reflecting its flagship brand Jim Beam, and is expected to bear much of the existing debt. The Home and Security business will be named Fortune Brands Home and Security, Inc. and the company has filed a Form 10 with the SEC in connection with its proposed spin-off of the business to its shareholders.
Fortune currently has adequate liquidity with cash and equivalents of $287 million and no borrowings under its $750 million three-year committed revolving credit agreement at June 30, 2011. The credit facility contains a minimum consolidated interest coverage covenant requiring a coverage ratio of 3.0 times (x) through 2011 and 3.5x through 2012. The company has meaningful room under the covenant as EBITDA to gross interest was 5.5x as of the latest 12 months ended June 30, 2011. The company's total debt to EBITDA was 3.7x for the same period. Fitch expects Fortune to maintain adequate liquidity as the company has historically generated considerable free cash flow.
Fitch affirms the following ratings:
Fortune Brands, Inc.
--Long-term IDR at 'BBB-';
--Short-term IDR at 'F3';
--Revolving credit facility at 'BBB-';
--Senior unsecured notes and debentures at 'BBB-';
--Commercial paper at 'F3'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Corporate Rating Methodology (Aug. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Primary Analyst
Christopher M. Collins,
+1-312-368-3196
Associate Director
Fitch, Inc.
70 W.
Madison Street
Chicago, IL 60602
or
Secondary Analyst
Grace
Barnett, +1-212-908-0718
Director
or
Committee Chairperson
Wesley
E. Moultrie II, CPA, +1-312-368-3186
Managing Director
or
Media
Relations:
Brian Bertsch, +1-212-908-0549
Email: brian.bertsch@fitchratings.com