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Moody's raises Pernod Ricard's ratings to Baa1 with stable outlook

Moody's on Oct. 18 upgraded Pernod Ricard SA's long-term issuer and senior unsecured ratings to Baa1 from Baa2 with a stable outlook.

The agency also affirmed the French distiller's P-2 short-term ratings, as well as that of its guaranteed subsidiary, Pernod Ricard Finance SA.

Moody's said the upgrade reflects the company's track record of strong profit growth, which stems from steady sales growth, positive product mix and efficiency gains that reduced leverage and boosted credit metrics.

The ratings upgrade takes into account Pernod Ricard's exposure to volatility in emerging markets, low-growth environment in developed markets and the possibility for continuing bolt-on acquisitions and sizable shareholder distributions, Moody's said.

The Paris-based wines and spirits producer's stable outlook reflects the agency's expectation that credit metrics will remain broadly stable with stronger earnings offsetting the increase in net debt.

Moody's expects organic profit growth in 2020 to be in the mid-single-digit range, in line with the company's guidance.

"This profit growth will be more moderate than before, reflecting the normalization in growth rates in China and India, and a more uncertain global macroeconomic environment, including the potential impact of the additional US tariffs that will affect single malt Irish or Scotch whiskies with UK origin," the rating agency said.

The company's Moody's-adjusted operating cash flow should remain steady at €1.8 billion to €1.9 billion over 2020-21, while free cash flow is expected to hover at about €400 million to €500 million each year, excluding nonrecurring items.

The agency expects net debt to rise by about €600 million each year brought about by the €1 billion buyback program over 2020-21 plus the ongoing M&A activity. Moody's adjusted debt/EBITDA in 2020 is expected to remain stable at 3.2x due to stronger earnings, with a modest improvement toward 3.0x in 2021.

Moody's said continuing improvement in Pernod Ricard's profitability and free cash flow generation could result in an upgrade, with Moody's-adjusted debt/EBITDA sliding below 3.0x and retained cash flow /net debt heading toward 20%. On the other hand, a downgrade could occur from a combination of deteriorating operating performance backed by a drop in operating profit, Moody's-adjusted debt/EBITDA rising above 3.5x and RCF/net debt moving below the low teens on a sustainable basis.

In September, Fitch ratings upgraded Pernod Ricard's ratings to BBB+ from BBB, with a stable outlook. S&P Global Ratings on Oct. 18 upgraded the company's ratings to BBB+ from BBB as well.