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Fitch upgrades Pernod Ricard SA on deleveraging efforts

Fitch on Dec. 20 upgraded Pernod Ricard SA's long-term foreign-currency issuer default rating and senior unsecured rating to BBB from BBB-. It also affirmed Pernod's short-term issuer default rating at F3. The outlook is positive.

The upgrade reflects the beverage company's "significant" deleveraging in the past two years, as well as its strong business profile, solid operating performance and improving profitability, Fitch said. The lack of a large M&A deal should result in further deleveraging and will support a potential upgrade up to BBB+ if Pernod reaches a similar leverage as industry leader Diageo, the rating agency added.

Fitch expects Pernod's organic sales growth to reach 4% to 5% per annum over fiscal year 2018 to fiscal year 2019, before moderating to 3% annually, on the back of an improving operating environment in emerging markets such as China, Brazil and Russia.

India, the firm's second-largest market in sales globally, will continue to post modest growth due to demonetization and highway sales restrictions, but other Asian markets should pick up the slack. Volume growth in western Europe and the U.S. will likely register in the low single digits in the medium term amid strong competition.

The rating agency forecasts Pernod's EBITDA margin to rise to 30% by fiscal year 2021. Profits will be supported by "wide geographical diversification, pricing power and a strong brand portfolio, together with an active, market-tailored cost management."

Fitch expects the firm's free cash-flow generation margin to remain robust at 6% to 7% or €0.7 billion to €0.8 billion annually in the next four years. Debt burden should see a further decline to below 4.0x by 2019-end. Pernod's stronger balance sheet could push it to "more actively" seek bolt-on M&A transactions, and is expected to spend up to €500 million per year on small to medium-size acquisitions instead of larger deals, the rating agency said.