San Miguel Brewery Receives Aaa Issue Rating for PhP20B Proposed Bond Issuance

Mandaluyong–(PHStocks)–Philippine Rating Services Corp. (PhilRatings) has  assigned a PRS Aaa issue rating for San Miguel Brewery Inc.‘s (PSE: SMB) proposed bond issuance of up to PhP20 billion. The bonds will have a minimum tenor of five years up to a maximum of ten years.

The proceeds from the proposed bonds will be used to refinance the company’s current and upcoming maturities. These include Series A of its outstanding P38.8 billion bond issue worth P13.59 billion which will mature on April 3, 2012 and a US$300 million term facility. The P38.8 billion bond issue currently has an outstanding PRS Aaa issue rating with PhilRatings.

A PRS Aaa-rated debt security is defined as: “Obligations rated  PRS Aaa are of the highest quality with minimal credit risk. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.” The rating assigned to the proposed bond issuance of up to PhP20 billion reflects the following key considerations: (1) SMB’s dominant market position domestically; (2) experienced management and production team, with technical support from shareholder Kirin Holdings; (3) high cash from operations and profitability; (4) sustained financial flexibility and adequate capitalization; and (5) enhanced  financial position of the company in the medium term given that its refinancing plan will allow it to take advantage of current favorable market rates and extend maturities.

PhilRatings’ ratings are based on available information and projections at the time that the rating review was undertaken. PhilRatings shall continuously monitor developments relating to SMB and may change the rating at any time, should circumstances warrant a change.

SMB is the long-time leader in the Philippine beer industry, with a reported estimated market share of more than 90% in 2010. It has six main production facilities in the Philippines, which produce its line up of well known brands including San Miguel Pale Pilsen, Red Horse Beer and San Mig Light, and these are sold through an extensive and efficient distribution system. PhilRatings believes that the company’s market dominance in the Philippines will continue to be supported by these factors and the high barriers to entry that exist for prospective players.

SMB is 51%-owned by San Miguel Corporation (PSE: SMC) and 48.38%-owned by Kirin Holdings Company Ltd (Kirin). Kirin has been a leading global food and beverage manufacturer since 1907 and its international exposure and experience further enhance SMB’s competitive position. SMB shareholders are currently looking at available alternatives to determine the optimal way by which to achieve the 10% float requirement of the Philippine Stock Exchange (PSE).

The company has performed well historically in relation to its profitability as can be seen in its average Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) profit margin of 32% for the period 2005 to 2011. From 2009 onwards, when the company issued its PRS Aaa rated P38.8 billion bonds, the company’s EBITDA interest coverage  averaged about 5.9x. Historically, SMB has generated more than sufficient earnings to service its debt and to provide more than adequate protection against unexpected external shocks. PhilRatings believes that SMB’s historical profit performance will continue, supported by its strong market position.

In 2011, the company’s liabilities to equity ratio was at 2.3x while its liabilities to assets ratio and solvency ratio were at 70% and 1.4x, respectively. PhilRatings considers these figures to be stable considering the company’s historical debt management performance, high cash from operations and sustained profitability. This is particularly so since the proceeds of the proposed bond issuance will be used for refinancing, thereby allowing SMB to extend its debt maturities and lower its interest burden given current favorable market rates.

Going forward, SMB intends to continue growing its market by focusing on particular niches and geographical areas. It likewise keeps abreast of global trends and developments to generate new product ideas. Steps to be taken by SMB shall be followed closely by PhilRatings, together with the results and/or effects of any change in tax regime which may occur in the short- to medium-term.

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