Moody’s Investors Service assigned a Caa1 to Blue Ribbon, LLC’s secured revolving credit facility following the amendment that extended its maturity from September 30, 2020 to June 30, 2021. Other ratings including the Caa1 Corporate Family Rating are unchanged. The outlook remains negative.
The transaction is credit positive because it provides Blue Ribbon additional time to execute its de-leveraging plans and pursue a broader refinancing, but because the nine-month maturity extension is relatively short the Caa1 CFR and negative outlook are not affected. The Caa1 rating on the senior secured revolver, which is the same as the CFR, reflects refinancing risk in the current volatile environment, high debt to EBITDA leverage, an aggressive financial policy, particularly with respect to back up liquidity, and challenges to grow volumes in the core business.
Debt-to-EBITDA leverage, which was approximately 7x as of March 2020 (including Moody’s adjustments), will remain high unless the company executes its plans to deleverage through asset sales later in the year. The negative outlook reflects the fact that Blue Ribbon’s revolving credit facility is current even following the maturity extension, with the expiration set for June 30, 2021 following the most recent amendment.
The absence of a revolving credit facility would weaken the company’s liquidity despite good internal cash sources, including approximately $28 million of cash on hand at the end of June, up from $15 million at the end of December. The revolver was reduced in a previous amendment to $36 million from $95 million.
While the revolver is currently undrawn, the company relies on it for letters of credit supporting its brewing arrangement with Molson Coors. Also, the revolver is an important alternate liquidity source in the event of unexpected operating challenges, which cannot be ruled out given the severe disruptions that are being caused by the spread of the coronavirus in the US.
It is Moody’s understanding the Company plans to refinance its credit facilities before their maturities. The term loan facility will mature in November 2021 which will also need to be addressed in the near term. A longer-term refinancing that addresses these upcoming maturities and improves liquidity could result in the stabilization of the outlook.
Blue Ribbon, LLC Rating assigned:
Senior Secured Revolving Credit facility due June 2021 at Caa1 (LGD3)
Outlook remains negative
Moody’s withdrew the Caa1 rating on the previous revolver expiring in September, 2020
Blue Ribbon’s Caa1 Corporate Family Rating reflects its near-term revolver maturity, high financial leverage (Debt to EBITDA at around 7x range including Moody’s adjustments), small scale and its heavy reliance on its largest brand, Pabst Blue Ribbon, which accounts for nearly half of sales and has seen slowing revenue growth and recent volume declines. The company has seen top line declines for the last several years as it has downsized its hard soda portfolio and exited the hard cider business.
The company has experienced further volume declines as a result of Coronavirus pandemic, due to the 20% of its business typically derived from on-premise channels that were largely shut down for several months, partly offset by a surge in volume in take home channels. In the face of these challenges, Blue Ribbon has cut costs enabling it to preserve cash flow and outperform its original budget expectations. Still, the ongoing disruption related to the coronavirus adds uncertainty about the ability of the company to continue to take pricing to offset volume declines.
Moody’s expects that the company will continue to face tough competition from larger competitors. While operating margins have improved in recent years, they are still thin relative to larger beer producers. Blue Ribbon also has more limited geographic diversity and small scale compared to other beer companies and to other beverage companies in general. However, its US focus, where beer production and sales were considered essential in most markets, gave it an advantage in recent months over companies with more international footprints.
The rating is supported by its well-known, iconic brands, the strong market position of its largest brand as one of the most affordable beers in its category, success of certain recent brand additions and partnerships, minimal need for working capital and capital investment, and good free cash flow. Blue Ribbon’s portfolio includes more than 30 active brands that are helping to revitalize and premium its portfolio. While the beer category has been in decline in the US for some time, Blue Ribbon has successfully taken pricing which helps to mitigate the volume declines.
In November 2018 the company settled its lawsuit with Molson Coors, extending the length of the co-packing arrangement through 2024. On January 6, 2020, Blue Ribbon entered into an agreement with Molson Coors Beverage Company giving it an option to purchase one of that company’s brewing facilities located in Irwindale, California. In addition, in November 2019, Blue Ribbon announced that it had reached an agreement to transition its production to City Brewing. This removed the uncertainty surrounding the phase out of the Molson Coors relationship.
Environmental, Social and Governance considerations:
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody’s regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
Like other alcoholic beverage companies, Blue Ribbon monitors its social risks closely, including product quality and safety, clean labeling and messages about alcohol content and responsible consumption. While the alcoholic beverage industry is subject to some risk due to health concerns and the impact of drunk driving, Blue Ribbon and the industry as a whole has made meaningful efforts to disclose the risks and promote moderate consumption of alcoholic beverage products.
Blue Ribbon’s environmental impact remains low and the associated risks are limited. Environmental considerations are not a material factor in the rating.
Blue Ribbon’s governance is influenced by its private ownership. Like other private equity sponsored firms, Blue Ribbon has been comfortable operating with high financial leverage and recently, with very limited external alternate liquidity. Moody’s views private equity ownership and the company’s aggressive financial policies as a risk, however management has recently indicated that it would aim to reduce leverage to 5x or under.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The rating could be upgraded if the company improves its liquidity, provides visibility into a longer- term operating plan, generates good and predictable cash flows, successfully executes its growth strategies to support sustained top line and operating profit expansion, and reduces leverage. An upgrade would require that leverage is reduced such that debt to EBITDA (including Moody’s standard adjustments) is below 6.5x.
The rating could be downgraded if the company fails to address liquidity including its alternate liquidity arrangements, if operating performance weakens such that EBIT/interest falls below 1x, debt/EBITDA is sustained above 8x, or free cash flow becomes negative. In addition, leveraged acquisitions, or leveraging transactions including substantial dividend distributions before debt/EBITDA declines below 5x, could also lead to a downgrade. The execution of a distressed exchange could result in a default.
The principal methodology used in this rating was Alcoholic Beverages Methodology published in February 2020.
Headquartered in San Antonio, TX, Blue Ribbon, LLC (parent company of Pabst Brewing Company) is one of the largest privately held independent brewers in the US, though well behind market leaders in scale, with a portfolio of iconic American beer brands. Major brands in the company’s portfolio include Pabst Blue Ribbon, Lone Star, Rainier, Old Milwaukee, Colt 45, Schlitz and Not Your Father’s hard sodas. The company also has a long-term arrangement to market and distribute Tsingtao in the US. The company is owned by a consortium of private investors. Annual net sales for 2020 are expected to approach approximately $500 million.