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S&P upgrades Pernod Ricard's ratings to BBB+

S&P Global Ratings on Oct. 18 upgraded Pernod Ricard SA's long-term issuer credit and senior unsecured debt ratings to BBB+ from BBB, with a stable outlook.

The agency also affirmed the French distiller's A-2 short-term issuer credit rating.

Ratings said the upgrade reflects its expectation that the company's credit metrics will continue to improve in the next 18 to 24 months, driven by organic revenue growth, the moderate upside on margins and a focus on cash conversion.

It also expects Pernod Ricard's organic sales growth to increase in the second half of fiscal year 2020. The agency believes the Paris-based maker of wines and spirits will maintain strong performance, boosted by positive growth in volumes, prices and product mix.

In addition, Ratings expects the company's EBITDA margin to expand moderately due to cost-saving measures aimed at cutting general corporate and administrative expenses. It still projects a rise in marketing and distribution spending to support sales of Pernod Ricard's international brands.

The agency expects the spirits company to continue with its selective acquisition strategy of purchasing entities in fast-growing product categories such as gin and scotch. Pernod Ricard has so far acquired distiller Castle Brands Inc., whiskey-maker Rabbit Hole, gin brand Malfy and spirits company Firestone & Robertson this year.

Meanwhile, Ratings said the stable outlook reflects its base-case expectation that the company will maintain an adjusted leverage ratio of below 3.0x and a continuous healthy annual cash flow generation of about €1.3 billion to €1.4 billion over the next couple of years.

The agency said a positive ratings action is possible if the company can establish a solid track record of positive organic growth, with market share gains in key countries such as the U.S., India and China, as well as a sustainable improvement in EBITDA. An upgrade is also dependent on Pernod Ricard sustainably maintaining an adjusted leverage ratio of about 2.0x.

Conversely, Ratings could downgrade Pernod Ricard's ratings if it makes large debt-funded acquisitions or if the company's adjusted leverage ratio moves permanently to or above 3.5x, with no means to gradually deleverage.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.