Potential tender could flatten Anheuser Busch Inbev curve
admin | December 20, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The Anhueser Busch Inbev (ABIBB) curve looks attractive relative to its peers. In particular, the 8.2% 1/15/39 bonds trade roughly 20 to 30 bp wide on a g-spread basis to the lower coupon 4.375% 4/15/38 and 5.45% 1/23/39 bonds. ABIBB’s curve has the potential to flatten as the company has used proceeds from its Asian IPO to reduce debt and has earmarked its Australian asset sale proceeds for further debt reduction.
With no term loans outstanding, management noted on its 3Q earnings call that asset sale proceeds will go to bond redemptions. The Asian IPO brought in $5.7 billion while the Australian sale proceeds are expected to be $11.3 billion when the deal closes in 1Q20. ABIBB’s debt profile has a lengthy weighted average maturity of 14.3 years, while the weighted average coupon is a little high at 3.94%. This compares to the 2.82% weighted average coupon of Diageo’s (A3/A-/A-) debt profile, while Starbucks Corp.’s (Baa1/BBB+/BBB+) weighted average coupon is 3.32%.
Exhibit 1: ABIBB 10- to 30-year curve vs peers
Leverage below 4.0x
Management noted that pro forma the aforementioned IPO and asset sale, net leverage will be below 4.0x. This essentially means that ABIBB has hit its 4.0x net leverage target roughly one year ahead of prior guidance. While management has continued to reiterate its net leverage target of 2.0x, no timeframe has been provided. The 2.0x net leverage is a lofty goal over the intermediate term as the company continues to witness volume declines and EBITDA margin contraction. Total volumes were down 0.5% in 3Q while the EBITDA margin declined 107 bp to 40.2%.
Debt reduction commitment stabilizes ratings
Post 3Q results and the debt reduction from the IPO, S&P revised its outlook from negative to stable. The agency noted that the divestitures in 2019 coupled with the dividend cut in 2018 underscores management’s commitment to reducing leverage. S&P believes that net leverage will likely approach 3.5x by year-end 2020. Additionally Fitch revised its outlook to positive from stable reflecting management’s financial policy shift, noting its more creditor-friendly. Fitch expects net debt to decline to roughly $80 billion by year-end 2020, which would be consistent with S&P’s net leverage forecast of 3.5x. Should ABIBB maintain its current financial policy, Fitch believes net leverage could fall to the 3.0x area by year-end 2021, which would warrant an upgrade to BBB+.
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