(The following statement was released by the rating agency) Fitch Ratings-Sydney-June 13: Fitch Ratings has assigned Amphora Finance Limited a final Long-Term Issuer Default Rating (IDR) of 'B'. The Outlook is Stable. Fitch as also assigned Amphora's senior secured GBP301 million Term Loan B, due seven years from close, a final rating of 'BB-' with a Recovery Rating of 'RR2'. Amphora is a holding company that wholly owns Australia-based wine producer, Accolade Wines. Accolade is the fifth-largest wine company globally by volume and a leading player in the UK and Australian markets. The rating assigned to Accolade reflects its strong business profile, given its market positions in core geographies, high-quality asset base and diversified sourcing arrangements. However, its credit profile is constrained by the group's high leverage, defined as FFO adjusted net leverage, which Fitch expects to remain above 5.0x until at least the financial year ending June 2020 (FY20). We also expect the company to take longer than its target of four years to achieve a company-defined net debt/EBITDA of 3.0x or lower. This rating follows the completion of the acquisition of Accolade by The Carlyle Group (NASDAQ:CG) and the receipt of relevant loan documents confirming information already received. KEY RATING DRIVERS Sustained High Leverage: Carlyle's acquisition of Accolade and subsequent changes to the capital structure will result in Accolade having pro forma leverage of 6.4x at FY18. Accolade plans to deleverage using operating cash flow, but Fitch expects no significant deleveraging until FY20 because the company's construction of its Berri bottling facility will only be completed at FYE19. Accolade's financial profile would improve and positive rating action may result if it can achieve its target of reducing leverage to 3.0x within four years, although this is not Fitch's base case. Premiumisation to Drive Growth: The trend towards premiumisation, or appealing to consumers by emphasising exclusivity and better quality, is a key growth driver in the wine industry, particularly in Accolade's key markets of Australia and the UK. Fitch believes Accolade's portfolio is well-positioned to capture outsized growth in premium product categories, supported by its recent acquisitions of Grant Burge and Fine Wine Partners, which bolstered the group's premium wine portfolio. Accolade's ability to promote these wines and achieve the benefits from this global trend is key to the company achieving revenue growth in these markets over the medium term. Focus on Growth in China: Accolade aims to increase its limited footprint in China to drive growth. China is the largest consumer of wine in the world, but continues to rank below global averages in consumption per capita, indicating potential for growth. In addition, imported wines are becoming increasingly popular with Chinese consumers. However, the market is competitive and Accolade is expanding in the market after the success of other Australian wine producers, namely Treasury Wine Estates Limited and Yellow Tail. Accolade's success in achieving its stated growth target will depend on securing appropriate distribution channels, correct portfolio positioning and execution of its plan using a measured approach; this should help rein in costs, which Fitch considers as a key risk to this strategy. Leading Global Wine Producer: Accolade is the fifth-largest wine group in the world by volume. It is the leading player in the UK by volume and value (8% market share), which is twice the market of the second-largest UK competitor. In Australia, it is the leading player by volume and number two by value. The UK and Australia rank third and fourth, respectively, per capita wine consumption globally and consumption has been resilient even during economic downturns. Accolade's portfolio of around 50 brands supports its market position and includes Hardy's - the best-selling wine brand in the UK and one of the top-10 brands globally. Sustainability of Supply: Accolade is reliant on external suppliers. It sources around 97% of its wines from purchased grapes (around 66%) and bulk wine (around 30%). The group has an evergreen supply contract with The Riverland Grape Producers Co-operative (CCW), the largest single supplier of Accolade's grapes that accounts for around 48% of the company's total wine source. CCW is Australia's largest grape grower co-operative with over 500 growers, and its supply to Accolade historically has benefited from the stable composition of the co-operative and its market-based pricing structure. The location of Accolade's major wineries in Australia's Riverland region also benefits from the region's access to South Australia's Murray River as a water source. This has helped the region deliver stable grape volumes over the past decade, despite being located in inland Australia and subject to drought weather conditions. Berri Facility to Reduce Costs: Accolade has a favourable cost position compared with peers, primarily due to the efficiencies it derives from its Accolade Park bottling facility in Bristol, UK. Fitch expects the opening of a similar bottling facility in Berri, South Australia, due in 2019, to deliver significant annual cost savings. This, alongside the revenue growth from the increasing share of premium products in Accolade's wine portfolio, is likely to bridge some of the margin gap with peers. Term Loan B Notched for Security: The 'BB-' rating on Amphora's senior secured Term Loan B reflects the guarantee and security provided under the loan terms. The loan is guaranteed by entities within the 100%-owned group, which cover at least 80% of group EBITDA, including all companies contributing 5% or more of group EBITDA on a standalone basis. The loan also benefits from security over group assets, with a floating charge over the shares and all assets in the UK and Australia. Our bespoke analysis indicates a recovery given default of 86%, as reflected in the 'RR2' Recovery Rating assigned to the loan. DERIVATION SUMMARY Amphora's rating reflects its high leverage, which constrains the company's IDR to 'B'. Amphora's financial profile is weaker than that of global peer, Russian spirits producer PJSC BELUGA GROUP (B+/Stable), reflecting Fitch's expectation that its FFO adjusted net leverage will remain above 5.0x until at least FY20, compared with Beluga's of around 4.0x over the same period. At the same time, Beluga has a leading market position in Russia and strong brand portfolio in the Russian spirits market. These factors account for the one-notch differential between the two companies' IDRs. Beluga's rating also reflects the higher-than-average systemic risks associated with the Russian business and jurisdictional environment. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer - Group sales volume to range between 26 million and 28 million nine-litre cases per year - Price per case to increase due to premiumisation of Accolade's portfolio - Cost savings from Fine Wine Partners acquisition as well as economies of scale and increased efficiencies from the Berri facility - Capex per year of AUD30 million-40 million in FY18 and FY19 and around AUD25 million in FY20 and FY21 Recovery Assumptions: - Amphora would remain a going concern in restructuring and be reorganised rather than liquidated. We have assumed a 10% administrative claim in the recovery analysis. - A 33% uplift to FY17 Fitch-calculated EBITDA, reflecting our expected cost savings from the Berri facility, Fine Wine Partners synergies and further costs savings at Accolade Park. This results in a post-restructuring EBITDA of around AUD95 million. At this level, we would expect Amphora to generate positive free cash flow. - A distressed multiple of 7.0x, reflecting Amphora's market position versus sector peers and recent multiples in the sector. - The AUD150 million revolving credit facility would be fully drawn in a restructuring scenario. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action Fitch does not anticipate taking positive rating action over the next one to two years as Amphora deleverages towards its target capital structure. However, the following developments may, individually or collectively, lead to positive rating action: - FFO adjusted net leverage improving to below 5.0x for a sustained period (Fitch's pro-forma FY18 forecast: 6.4x). - FFO fixed charge cover improving to above 2.5x for a sustained period (Fitch's pro-forma FY18 forecast: 2.0x). - Delivery of the business plan, as illustrated by the Berri plant being operational and materialising of anticipated cost savings, success of brand rationalisation/premiumisation and implementation of the China strategy. Developments that May, Individually or Collectively, Lead to Negative Rating Action - FFO adjusted net leverage deteriorating to above 6.5x for a sustained period. - EBITDA margin deteriorating to below 10.0% for a sustained period (pro forma FY18: 11.5%). - Deterioration in the group's business profile, for example, if volume declines by 20% or more for a sustained period, the sale of one or more of its main brands without a proven replacement, or loss of a major customer in the concentrated UK or Australian liquor retail markets (such as Tesco (LON:TSCO) in the UK or Woolworths and Coles in Australia). LIQUIDITY Refinancing Provides Headroom: The new capital structure, following completion of the Carlyle acquisition of Accolade, consists of a revolving credit facility of AUD150 million and a term loan of GBP301 million (AUD550 million equivalent), both of which are secured by group assets, with a floating charge over the shares and all assets in the UK and Australia. Fitch expects the revolving credit facility to remain undrawn, with the term loan to be fully drawn and cash from the acquisition of AUD25 million to fund the Berri bottling project. Accordingly, Amphora has sufficient liquidity headroom over the next two to three years to implement its strategy, with little refinancing risk, as debt maturities are in six and seven years, respectively. Contact: Primary Analyst Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney, NSW, 2000, AUSTRALIA Secondary Analyst Leo Park Associate Director +61 2 8256 0323 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307
For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023785 Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10024585 Sector Navigators (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023790 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10033871 Solicitation Status https://www.fitchratings.com/site/pr/10033871#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2018 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.