Rating of Global Beverage Market

 Rating of Global Beverage Market
Credit Rating Evaluation of Diageo PLC against Heineken, Brown-Forman and Pernod Ricard
Name of student:
Admission:
Course:
Institution:
Instructor:
Date of Submission:
Rating of Global Beverage Market
Credit Rating of Beverage Industry
According to Bouckley (2013), credit rating agencies have revised upward the credit rating
outlook for the global beverage industry. The credit rating agencies cite the reason for upward
revision of the beverage industry players is due to a rising middle class that is exerting increasing
demand for high-end wines, premium beers and spirits from big players such as Diageo,
Heineken, Pernod Ricard, Brown-Forman, Bacardi, SAB Miller, AB InBev and Molson Coors.
Bouckley (2013) asserts that Moody’s, which is a bond credit rating business, has revised the
global beverage industry outlook from a stable rating to a positive rating. Furthermore, the credit
rating company expects operating profit for beverage players to grow on average by 6% in 2013
and into the early year of 2014. This comes against the backdrop of the global economic
challenges, especially in developed markets which gave been hard hit by either recession or slow
growth. According to credit rating agencies the slow economic growth in developed markets of
Europe and Australia, which has affected the consumption of premium beer, spirits and high-end
wines, will not affect financial bottom line of beverage makers thanks to the resilience of the
emerging economies and the improving economy of the United States of America. Therefore, the
growth and sustained financial performance of global beverage players will be fuelled by the
expanding middle class in emerging markets and the improving consumption patterns in the
United States of America due to the improving economy. As a result sustaining demand for high
end carbonated drinks, such as premium beer and high-end wines and spirits.
Credit Rating of Diageo PLC
According to Diageo (2012), Diageo PLC was formed from the business merger of two U.K
based beverage companies, Grand Metropolitan PLC and Guinness PLC. The two respective
companies, before the merger, financed their operations largely from equity capital, a situation 
Rating of Global Beverage Market
that lowered their debt to equity ratio and net debt to total capital. As a result, the Grand
Metropolitan PLC and Guinness PLC maintained a high quality credit rating of A and AA
respectively. Following the merger and the creation of Diageo, the new company Diageo wanted
to maintain the high quality credit rating of the two parent companies. Therefore, Diageo PLC
continued to keep an interest rate coverage of between 5 and 8, a gearing at 25%, a low
EBITDA/Total Debt and a low Debt/EBITDA. The low debt/EBITDA improved the ability of
Diageo PLC to pay back its debt within a relatively short period. The ability of the United
Kingdom based beverage maker to settle its debt obligation was furthered bolstered by the
company’s high EBIRDA/Interest expense. Because of a conservative financial policy and the
healthy solvency ratios that Diageo PLC recorded, the company probability of financial distress
was very low, resulting to Diageo being awarded a high quality credit rating of A+. According to
Diageo (2012), the group management improves shareholders’ wealth by improving the return
on investments and managing capital structure. Prudent management of capital structure aids the
beverage maker to access debt from the debt market at lower yields and issue short-term
commercial papers at attractive market yields.
Despite strong solvency and liquidity ratios, Diageo PLC has been subjected to numerous credit
ratings, some revising the rating upward or downward. According to Moody’s (2013a), on
September 2013, Moody’s revised the credit rating outlook of Diageo from negative to stable.
This was the period after the merger of Guinness PLC and Grand Metropolitan PLC to form
Diageo PLC. On July 18, 2000, Moody’s confirms A1 rating of Diageo and gives the beverage
maker a stable outlook. On 12 November 2000, Moody’s downgrades Diageo PLC credit rating
from A1 to negative. Senior unsecured rating is further downgraded to A2 on 14 March 2003. On 
Rating of Global Beverage Market
17 October 2005, Moody’s downgrades Diageo to A3 with a short-term outlook of P-2 from P-1.
The credit rating of Diageo PLC by Moody’s has remained unchanged despite all the economic
scenarios that have shaped the global beverage market and the expansion strategy of Diageo PLC
into emerging markets and frontier markets in Africa. According to Reuters (2012), the S&P on
24 October, 2005 gave Diageo PLC a long-term credit rating of A and a short-term credit rating
of A-1. On 1 September 2005, the S&P had downgraded Diageo PLC to a long-term credit rating
of A- and a short-term credit rating of A-2. Fitch has also affirmed Diageo’s long-term credit
rating at A- and shor