The Long and Short

Anheuser-Busch keeps its eye on debt reduction

| May 6, 2022

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.

ABIBB posted solid fiscal first quarter results, underscored by double-digit revenue growth and solid EBITDA performance. All regions performed well except China, where strict zero-COVID policy kept lockdowns and restrictions in place in its two largest cities of Shanghai and Beijing. The EBITDA growth helps reduce leverage, while management continues to prioritize debt reduction, having repaid over $3.0 billion of debt in the quarter. That combination should help bring leverage closer to 3.0x, the threshold to be upgraded to single-A.  ABIBB debt spreads have lagged peers given its bloated balance sheet since the close of the SAB Miller acquisition. Declining leverage should tighten credit spreads, as the company takes advantage of repaying higher coupon debt at attractive prices given the rate move.

Exhibit 1. ABIBB Debt Profile

Source: ABIBB Earnings Presentation; APS

Debt Reduction Has Reduced Short-Term Financing Pressure

After paying down roughly $10 billion of debt in 2021, ABIBB continued to focus on debt reduction in 2022, with an additional $3.1 billion debt paydown in 1Q22.  Management has explicitly stated that deleveraging is the most accretive opportunity near-term, as they look to optimize their capital structure. ABIBB executed the debt reduction via the make-whole call option on both its 3.65% 2/1/26 and 4.915% 1/29/46 bonds. This puts the weighted average coupon of ABIBB’s debt at roughly 4% with the weighted average maturity being close to 16 years. The company now only has $200 million of debt maturing this year and none maturing in 2023.  This provides flexibility in targeting additional high coupon debt in its debt reduction efforts, versus just paying down short-term debt.  Furthermore, 93% of the debt portfolio is fixed rate debt, which bodes well in a rising rate environment and its debt portfolio contains no restrictive financial covenants.

Long-term Net Leverage Target Still 2.0x

Estimates are that ABIBB ended the quarter with net leverage of 3.7x, which is down from 3.96x at year end.  Last quarter was the first time that leverage had declined below 4.0x since the acquisition of SAB Miller in 2016, which pushed net leverage to the 5.5x area.  While ABIBB ended 2019 with net leverage of 4.01x, the pandemic negatively impacted EBITDA in 2020, and despite debt reduction, ABIBB saw leverage increase to 4.78x at year-end 2020.  Looking at Exhibit 2., ABIBB believes its 2.0x net leverage target is where they maximize value creation as it allows for them to reinvest in the business while providing them with flexibility to pursue selective M&A and return capital to shareholders.  However, they did note that at 3.0x net leverage, they can capture roughly 90% of the value creation benefit. ABIBB could reach 3.0x net leverage some time in 2023, which means that ratings could move to the low single-A area at both Moody’s and S&P when that happens.

Exhibit 2. Deleveraging Provides Value Creation

Source: ABIBB Company Presentation; APS

Sales Growth Outpaces EBITDA Growth as Inflation Takes a Sip

ABIBB witnessed an 11.1% increase in revenues in the quarter as total volume was up 2.8%.  Management noted that they delivered volume growth in more than two-thirds of their markets, even in the face of the current “dynamic” operating environment.  EBITDA growth was also strong at 7.4%, but not able to keep up with top line growth as price increases in both 4Q21 and 1Q22 have lagged the pace of inflation.  Furthermore, SG&A was higher than expected due to continued supply chain restraints.  Management noted that commodity prices are moving much faster than anticipated, particularly in the beer category.  ABIBB anticipates that revenue growth will continue to outpace EBITDA growth for the full year due to a combination of volume and price increases.  The current full year outlook puts EBITDA growth in the 4%-8% range, which is in line with management’s medium-term outlook for the operating line item.

Meredith Contente
meredith.contente@santander.us
1 (646) 776-7753

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