Blue Ribbon, LLC -- Moody's upgrades Blue Ribbon LLC (Pabst) CFR to B2 on refinancing announcement, outlook stable

Rating Action: Moody's upgrades Blue Ribbon LLC (Pabst) CFR to B2 on refinancing announcement, outlook stableGlobal Credit Research - 16 Apr 2021New York, April 16, 2021 -- Moody's Investors Service, ("Moody's") today upgraded the Corporate Family Rating for Blue Ribbon LLC ("Blue Ribbon" or "Pabst") to B2 from Caa1 and the Probability of Default Rating (PDR) to B2-PD from Caa1-PD. At the same time, Moody's assigned B2 ratings to the company's proposed new senior secured 7-year term loan B and 5-year revolving credit facility. The existing term loan and revolver instrument ratings were unchanged at Caa1 and will be withdrawn when the new facilities close. The rating outlook is stable.The upgrade reflects materially better liquidity following the refinancing, and an improved capital structure with lower leverage after about $90 million of debt repayment, funded with proceeds from the sale to an affiliate of equipment, rights and leaseholds related to the Irwindale Brewery in California, as well as an equity injection by the owners. Moody's estimates that debt to EBITDA leverage (including Moody's adjustments) will be reduced from 6.4x for the 12 months ended September 2020, to approximately 5.2x pro forma at closing and based on estimated year-end 2020 results. Furthermore, Moody's expects that the company will generate modest positive free cash flow in 2021, and that a roughly 10% increase in EBITDA will reduce debt-to-EBITDA leverage to a mid- 4x range by year end 2021. Moody's assumes that high single digit revenue growth from a recovery in on premise beer sales, pricing and mix benefits fueled by new product introductions, and the company's cost savings initiatives will drive earnings growth despite headwinds from restoring sales and marketing spending to more normalized levels over time. Moody's also anticipates that the supply contract with City Brewing will provide greater flexibility to develop new products than existed under the Molson Coors relationship, and that the economics of the brewing contracts will be broadly similar. The refinancing of the secured revolver and term loan, both of which were current and due in 2021, resolves refinancing risk and meaningfully extends maturities.Moody's took the following rating actions:Ratings Assigned:Issuer Blue Ribbon, LLC$368M Senior Secured 1st Lien Term Loan B, Assigned B2 (LGD3)$52M Senior Secured 1st Lien Revolving Credit Facility, Assigned B2 (LGD3)Ratings Upgraded:Issuer: Blue Ribbon, LLCCorporate Family Rating, upgraded to B2 from Caa1Probability of Default Rating, upgraded to B2-PD from Caa1-PDOutlook Actions:Issuer: Blue Ribbon, LLCOutlook, changed to stable from negativeRATINGS RATIONALEBlue Ribbon's B2 Corporate Family Rating reflects improved financial leverage, a more conservative leverage target going forward, a more sustainable supply chain arrangement, expanding margins as the company shifts its mix to a more premium focus and the expectation for positive free cash flow. The rating is constrained by the company's small scale compared with much larger brewing peers, and its heavy reliance on its largest brand, Pabst Blue Ribbon (PBR), which accounts for nearly half of sales and has seen consistent revenue and volume declines. After several years of top line declines as the company downsized its hard soda portfolio and exited the hard cider business, Blue Ribbon LLC experienced further volume declines in 2020 as a result of the Coronavirus pandemic. Sales were pressured in 2020 because 20% of the company's business was typically derived from on-premise channels that were largely shut down for much of the year. This was partially offset by a surge in take home channels. In the face of these challenges, Blue Ribbon cut costs including sales and marketing expenses, enabling it to preserve cash and outperform its original budget expectations. Still, the ongoing disruption related to the coronavirus leaves some uncertainty about the pace of recovery. Despite the challenging year, the company was able to lower leverage organically during 2020. We expect sales growth in 2021 as the on-premise establishments gradually reopen, and as new partnership business comes on stream.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 partly because of the company's asset lite model. The company expects margin improvement due to premiumization but the success of the anticipated mix shift remains to be seen. 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, led to a smaller revenue decline during COVID than companies with more international footprints. The rating is supported by Blue Ribbon's 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 positive free cash flow that will be modest in 2021 but grow to more than $50 million in 2022. Blue Ribbon's portfolio includes more than 30 active brands some of which are helping to revitalize and premiumize its portfolio and it has established important partnerships, including an arrangement to produce and distribute Jack Daniels Country Cocktails in the US for Brown Forman Corporation (A1, stable). While the beer category has been in decline in the US for some time, Blue Ribbon has successfully increased pricing which helps to mitigate the volume declines in many of its beer brands. However, the company needs a rationale pricing environment to continue to be able to grow pricing. Blue Ribbon is seeking to reduce reliance on its declining legacy beer brands over time, and to increase its presence in premium beers and in the fast-growing premium flavored malt beverage (FMB) space.In November 2018 the company settled its lawsuit with Molson Coors over contract brewing, extending the length of the co-packing arrangement through 2024. In November 2019, Blue Ribbon announced that it had reached an agreement to transition its production to City Brewing (B1, stable). This removed the uncertainty surrounding the phase out of the Molson Coors relationship.As part of the settlement, 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. The company executed this agreement in Q4 2020. The sale of the equipment and leaseholds to City Brewing (B1, stable) in Q1 2021 resulted in a $45 million cash inflow that was used to repay debt. However, as part of the proposed refinancing, any remaining value in Irwindale, which was put in an unrestricted subsidiary, will be carved out of the new transaction and borrowing group. While this lowers management distraction, allowing it to focus on running the beer business rather than negotiate land sales, it does represent leakage of any potential value to the extent that further monetization above the exercise price would have accrued to Blue Ribbon and its lenders under previous arrangements.Liquidity will be improved by the refinancing which extends maturities. Internally generated cash is expected to be sufficient to cover cash needs including seasonal working capital. Moody's does not expect the company to need to draw on its revolver. External liquidity is considered adequate, but the $52 million revolver is currently needed in part to support $30 million of L/Cs that support the current co-brewing arrangement. This leaves modest availability for future unexpected needs, such as one-time costs. Moody's considers as a potential risk the fact that the company does not have full external back up liquidity for these potential obligations. As the company transitions to City Brewing over the next 4 years, the need for L/Cs will diminish which will improve liquidity. The revolving credit facility has a springing first lien net leverage ratio of 6.0x. If outstanding letters of credit on the revolver exceed $15mm then the covenant will be tested at the last day of each quarter that revolver borrowings exceed $0. If outstanding letters of credit are reduced to or below $15mm, the financial covenant will be tested when RC borrowings plus drawn and unreimbursed letters of credit are greater than 15% of the total amount of commitments. Even if tested, Moody's expects that the company will maintain plenty of cushion under the covenant. Alternate liquidity is minimal given that its assets are pledged to the secured facilities, and any remaining value in the Irwindale brewery will not benefit the borrower or its lenders.Environmental, Social and Governance considerations:The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of Blue Ribbon from the current weak global economic activity and a gradual recovery for the coming year. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Volatility can be still expected in 2021 due to uncertain demand characteristics, channel disruptions, and supply chain disruptions.In terms of other social factors, Blue Ribbon faces the risk of shifts in customer behavior as well as health and wellness considerations including those around the responsible use of alcohol, factors which can influence consumption of products it produces. 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, have 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 many other private firms, Blue Ribbon has been comfortable operating with high financial leverage, and recently with very limited external alternate liquidity. As part of the refinancing, the Blue Ribbon Partners, LLC, which is an investment platform led by American beverage entrepreneur Eugene Kashper, has become the sole owner. The exit of private equity firms should allow the company to take a longer term view, while the issuance of equity to further lower debt, and the commitment to a more conservative leverage target (a stated target of under 4x going forward by the company's definition) are positive governance factors.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGThe stable rating outlook reflects Moody's expectations that Blue Ribbon will increase revenue and EBITDA by roughly 10% in 2021 and that the company will generate sufficient cash flow. Moody's also expects that Blue Ribbon will reduce debt-to-EBITDA to a mid 4x range in 2021 through earnings growth, and that free cash flow will exceed $50 million in 2022.The ratings could be upgraded if the company improves its external liquidity, generates good and predictable free 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 sustained below 3.5x.The ratings could be downgraded if operating performance does not improve as expected such that EBIT/interest falls below 2x, debt/EBITDA is sustained above 5x, or free cash flow is low or negative. In addition, leveraged acquisitions or dividend distributions could also lead to a downgrade.As proposed, the term loan and revolver are expected to provide covenant flexibility that if utilized could negatively impact creditors. Notable terms include the following:Incremental debt capacity up to the greater of $87 million and 100.0% of Consolidated EBITDA , plus unused capacity reallocated from the general debt basket, plus unlimited amounts so long as pro forma Consolidated First Lien Net Leverage Ratio does not exceed 4.10: 1.00 (if pari passu secured).Amounts up to the greater of (A) $43.5 million and (B) 50.0% of Consolidated EBITDA may be incurred with an earlier maturity date than the initial term loans.The credit agreement permits the transfer of assets to unrestricted subsidiaries, up to the carve-out capacities, subject to "blocker" provisions which: (i) restrict the company from transferring material intellectual property to any unrestricted subsidiary; or (ii) prohibit the company from designating a subsidiary as unrestricted if it holds material intellectual property.Non-wholly-owned subsidiaries are not required to provide guarantees; dividends or transfers resulting in partial ownership of subsidiary guarantors could jeopardize guarantees subject to protective provisions which only permit guarantee releases if such transaction is entered into for bona fide business purposes and not for the primary purpose of causing such subsidiary to be released from its guarantee.The credit agreement provides some limitations on up-tiering transactions, including a requirement that each directly affected lender consents to amendments that subordinate the liens on all or substantially all the value of the collateral to the liens securing any other indebtedness or to contractually subordinate any obligations under the credit documentation.The above are proposed terms and the final terms of the credit agreement may be materially different.The principal methodology used in this rating was Alcoholic Beverages Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1212834. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Headquartered in San Antonio, TX, Blue Ribbon, LLC (parent company of Pabst Brewing Company) markets and sells a portfolio of iconic American beer brands. Major brands in the company's portfolio include its flagship Pabst Blue Ribbon, Lone Star, Rainier, Old Milwaukee, Colt 45 and Schlitz. The company also has Small Town's Not Your Father's Root Beer (among other hard soda varieties), and Jack Daniels Country Cocktails on its platform. The company is owned by Blue Ribbon Partners, LLC, an investment platform led by American beverage entrepreneur Eugene Kashper. Annual net sales are approaching $500 million.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Linda Montag Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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