Bloomberg News

Pernod Rise From Junk Cuts Rate to Record Low: Corporate Finance

October 24, 2011

Oct. 24 (Bloomberg) -- Pernod-Ricard SA’s ascent to investment grade is paying off in the credit markets, where the cost of insuring the bonds of the maker of Chivas Regal whisky and Absolut vodka has fallen while that of its peers climbed amid the euro-region debt crisis.

Credit-default swaps tied to Paris-based Pernod declined 13 percent in the past month, the only French consumer non-cyclical company to drop, according to data compiled by Bloomberg. The contracts tumbled 30 percent from a two-year high reached Sept. 6, two days before Europe’s second-largest drinks maker was upgraded to Baa3 from Ba1 by Moody’s Investors Service.

Pernod’s debt reduction is helping it weather the fallout from the sovereign meltdown, which has prompted Moody’s to cast doubt on France’s top Aaa rating. The distiller was able to raise $1.5 billion from its biggest dollar bond sale last week with the lowest coupon it’s ever paid for 10-year debt.

“To have that de-leveraging story come through is an immense help to U.S. investors,” said Patrick McCullagh, the head of European credit research in London at Schroder Investment Management Ltd., which manages 40 billion pounds ($64 billion) including Pernod bonds. Cutting debt is “not a bad place for a French company to be at this moment,” he said.

Standard & Poor’s followed Moody’s, lifting its rating for Pernod to BBB- from BB+ on Oct. 3. Both rating companies cited the distiller’s debt-reduction program and increases in profit and sales.

Shrinking Leverage

Pernod is seeking to cut its borrowings to about four times adjusted earnings before interest, taxes, depreciation and amortization by June 2012, from 4.4 times as of June 30, “and our intention is to go below that threshold afterwards,” Gilles Bogaert, the managing director for finance in Paris, said in a phone interview on Oct. 21. A day earlier, the company announced results that beat analysts’ estimates, and said it aims to increase profit by about 6 percent this fiscal year.

“We see ourselves as an investment-grade company, so that’s what we wanted to become,” Bogaert said. “We’ve been working consistently in the last three years to deleverage the company” after being cut to junk by Moody’s in 2008, he said.

Junk, or speculative-grade, companies are rated below Baa3 by Moody’s and less than BBB- by S&P.

The rating upgrades have prompted a rally in Pernod’s credit-default swaps and bonds and lowered its borrowing costs.

Relative Performance

Default swaps insuring the distiller’s debt dropped to 191 basis points, from 220 on Sept. 21, according to CMA, which is owned by CME Group Inc. and compiles price quotes by dealers in the privately negotiated market.

Contracts tied to supermarket operator Groupe Auchan SA were the next best performers among a basket of French consumer non-cyclical companies, holding at 96 basis points. Swaps on Carrefour SA, the world’s second-largest retailer -- which cut its profit forecast this month, prompting Moody’s to lower the outlook on its Baa1 rating to “negative” -- climbed to 199 from 175. Danone, the biggest yoghurt maker, rose to 91 basis points from 75 on Sept. 21, CMA prices show.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros ($13.9 million) of debt for five years is equivalent to 1,000 euros a year.

Lowest Coupon

Pernod paid its lowest ever coupon for debt maturing in more than 10 years on Oct. 20, pricing 4.45 percent senior unsecured notes due in January 2022 to yield 230 basis points more than Treasuries, according to Bloomberg data. That compares with a spread of 245 on the $1 billion of 5.75 percent bonds due 2021 it sold in April, its first issue in the U.S. currency. A basis point is 0.01 percentage point.

Among Pernod’s existing securities, its 1 billion euros of 5 percent notes due March 2017 rose to 103.2 cents on the euro to yield 4.31 percent, from 100.3 cents on Sept. 21, according to Bloomberg Bond Trader prices. The price climbed from 100.4 on the day of S&P’s upgrade.

The company’s 1.2 billion euros of 4.875 percent securities maturing in March 2016 rose to 103.3 cents to yield 4.03 percent, from 101.1 a month ago and 100.6 on Oct. 3.

“Now it’s cheap investment-grade paper rather than a safe, lower-yielding high-yield name,” said Andreas Dankel, the chief portfolio manager at Copenhagen-based Danske Bank A/S, which oversees about 60 billion euros of fixed-income assets including Pernod bonds. “It’s been a great, improving story from a safe high-yield perspective.”

Ratings History

Pernod was cut to junk by Moody’s following its 5.63 billion-euro takeover of Vin & Sprit AB, the Swedish maker of Absolut vodka, in 2008. It disposed of its Wild Turkey bourbon and Bisquit cognac brands in 2009 and raised 1 billion euros from a share sale after that acquisition almost doubled its debt to 12 billion euros. Pernod will use the proceeds of last week’s bond sale to help repay what’s left of its bank debt.

Moody’s assigned Pernod a “stable” outlook when it upgraded the company from junk on Sept. 8. The New York-based firm said the distiller reduced its reported net debt by about 1.5 billion euros to 9 billion euros in the financial year ending June 30, and that it would achieve its target of cutting debt-to-Ebitda to four times, from 4.4 times this year and 4.9 times a year earlier.

S&P followed this month, also giving Pernod a “stable” outlook to its new investment-grade rating and saying it had reduced bank debt to 4.3 billion euros as of the end of June, from 6.9 billion euros in 2010.

Credit Lines

The distiller would meet the conditions of, and be able to refinance, its loan plus about 500 million euros in drawn credit lines maturing July 2013, S&P said.

S&P forecast Pernod will reduce its debt-to-Ebitda ratio to about four times within two years, from its estimate of about 4.7 as of end-June.

Pernod was viewed by investors as “a crossover name rather than a pure high-yield name” before the upgrades, said Marc Blanc, an analyst at Societe Generale SA in Paris. Now, the company “broadened their investor base,” he said.

The upgrades elevate Pernod to the investment-grade status of other leading consumer non-cyclicals in France, though both Moody’s and S&P said they don’t foresee further increases in its ratings at this time.

Moody’s placed Carrefour’s Baa1 rating under review for possible downgrade on Oct. 14 after the company reduced its 2011 profit forecast to a decline of as much as 20 percent from the 15 percent drop foreseen in August.

Carrefour, Danone

It was the second time in three months that the supermarket operator cut its profit outlook, and Moody’s said its action was because of a deteriorating outlook for sales in France and “weakness” in the company’s finances. S&P has graded Carrefour an equivalent BBB+ since March, after cutting it from A-.

Paris-based Danone, which owns the Evian and Volvic mineral water brands, has been rated A3 by Moody’s since April 2008 and an equivalent A- by S&P since July 2007. Groupe Auchan has been rated A by S&P, the sixth-highest investment grade, since 2003.

All the companies are grappling with an economic downturn at home and in their major western European and U.S. markets. Moody’s said Oct. 17 that France’s Aaa rating was under threat from the cost of supporting euro-region nations and banks, as policy makers and government officials try to stem the sovereign crisis.

“There’s a deepening sense of unease whether the euro crisis can be fixed at all,” Bill Blain, the co-head of strategy at broker Newedge Group in London, wrote in an Oct. 21 report to clients.

Pernod reported first-quarter revenue growth of 11 percent on Oct. 20. Like its rivals, the company is depending on emerging markets to take up the slack in the recession-hit west, with sales of spirits including Martell cognac and The Glenlivet whisky in China, India and Brazil boosting sales. The company’s stock jumped 4 percent to 67.34 euros since the results, adding to its 9 percent increase in the past month.

--With assistance from Sapna Maheshwari in New York and Abigail Moses and Hannah Benjamin in London. Editors: Paul Armstrong, Michael Shanahan

To contact the reporter on this story: Ben Martin in London at

To contact the editor responsible for this story: Paul Armstrong at

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