Fitch Ratings upgraded its long-term issuer default rating and senior unsecured rating on Pernod Ricard SA to BBB+ from BBB, with a stable outlook.
The agency also raised the beverage company's short-term issuer default rating to F2.
Fitch said the upgrade reflects its view that the maker of Absolut vodka and Jameson whiskey has a sustainably strong business profile, and that it will maintain its leverage consistent with a high BBB category even though it has adopted more shareholder-friendly financial policies — including the €1 billion share buyback it announced when it reported fiscal 2019 earnings.
The rating agency expects the company's organic sales growth to remain between 3% and 5% for 2020 to 2022 and then moderate to 3% annually. This will be driven by the consistent sales performance of cognac, whiskey, tequila and gin, coupled with the company's further investments in gin and its re-entry into the bourbon segment, Fitch said.
In addition, Fitch expects Pernod Ricard to limit its acquisitions to bolt-on transactions and predicts an annual net M&A spending of about €250 million.
Fitch also forecasts a free cash flow margin reduction of 5.5% to 6.5% between 2020 and 2022, or about €600,000 per year, due to profit growth and Pernod Ricard's planned increase in capital expenditure for 2020.
The agency said it could further upgrade its ratings on the alcoholic beverages maker if funds from operations adjusted net leverage is sustained below 2.5x and if its free cash flow margin stays above 5% of sales.
Conversely, it could downgrade the company if its free cash flow margin reaches below 5% on a sustained basis due to weak sales growth and profit margins, and if funds from operations adjusted net leverage goes beyond 3.5x.
