BF.B Brown Forman Corp

Leading wine and spirits distributor, Constellation Brands Inc. (STZ), took a step forward in enhancing the flexibility of its finances by signing up for an additional credit facility with maturities ranging from five to seven years.

Constellation Brands has acquired a new senior credit facility, including a revolving credit facility and two-term loan agreements. The company’s new $850 million revolving credit facility has a maturity date after five years and currently remains undrawn. The two term loan agreements, A and A-1, worth $550 million and $250 million, respectively, extend over periods of five and seven years.  

Constellation Brands used the funds from the two term loans to pay back the outstanding amounts under the company’s previous senior credit facility.

The company’s new credit arrangement follows a $600 million worth senior notes issued on April 16, 2012. Bearing a coupon rate of 6%, these notes have a maturity date of May 1, 2022.

These transactions indicate that Constellation Brands is strictly focused on strengthening its financial position while also emphasizing on its future growth plans. These new credit arrangements significantly improve the company’s credit profile, providing ample liquidity and free cash flows to meet its capital needs over the next several years.

This along with a favorable interest rate environment will also accelerate the company’s strategic initiative of expanding foothold in the U.S wine industry.

Borrowing costs have gone down significantly, marking a record low, and in turn, facilitating the companies to obtain easy financing at compelling prices. Corporate bonds are in high demand as U.S. treasuries are yielding low rates, driving investors toward the bonds issued by the sound companies.

Debt offers of big companies are being oversubscribed, providing corporation’s the option to price their offerings at lower rates. Hence, several companies are coming up with debt offerings to generate interest expense savings by refinancing their outstanding borrowings.

Constellation Brands ended its fiscal 2012 with a healthy balance sheet and cash flows. During the fiscal, Constellation generated $784.1 million of cash from operations compared with $619.7 million in the previous year.

Apart from this, the company achieved a record free cash flow of $715.7 million. This enabled the company to reduce debt, as well as fund stock repurchases and acquisitions. Moreover, the company anticipates generating a free cash flow in the range of $425 million to $475 million during fiscal 2013.

Our Recommendation

Constellation Brands is the largest wine company in the world and commands a dominant position in the premium wine segment in the U.S. The company is also a leading producer of wines in Canada and New Zealand. This provides a competitive edge to the company and bolsters its well-established position in the market.

Moreover, we believe that the company’s strategic initiative of expanding footholds in the U.S wine industry along with focus on brand building and promotion will accelerate its growth opportunities while strengthening its market position. Moreover, in an effort to generate strong margins, Constellation Brands is also focusing on higher priced segment across all key categories.

However, the company faces intense competition from other well-established players in the industry, including Beam Inc. (BEAM), Brown-Forman Corporation (BF.B) and Diageo plc (DEO). Moreover, Constellation Brands also encounters competition from local and regional players in the respective countries. Consequently, this may dent the company’s future operating performance.

We currently have a Zacks #3 Rank (short-term Hold rating) on the stock. Our long-term recommendation on the stock remains Neutral.

 
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