STZ Sells $600 mn Senior Notes

In an effort to enhance its financial flexibility and focus on future growth prospects, the leading wine and spirit distributor Constellation Brands Inc. ( STZ - Analyst Report ) , has recently sold $600 million worth of senior notes, Reuters reported.

According to news, earlier the company has planned to sell $400 million of senior notes. The new senior notes have been issued at par with a coupon rate of 6% maturing on 1^st May, 2022. A consortium of Bank of America Merrill Lynch ( BAC - Analyst Report ) , JP Morgan Chase & Company ( JPM - Analyst Report ) , Rabo Securities USA and Barclays Capital are the Underwriters of this issuance.

Borrowing costs have gone down significantly, marking a record low, and in turn, facilitating the companies to obtain easy financing at compelling prices. Corporate bonds are in high demand as U.S. treasuries are yielding low rates, driving investors toward the bonds issued by the sound companies.

Debt offers of big companies are being oversubscribed, providing the corporation’s the option to price their offerings at lower rates. Hence, several companies are coming up with debt offerings to generate interest expense savings by refinancing their outstanding borrowings.

We believe the transaction will strengthen the company’s financial position. Though Constellation Brands has an obligation to repay $330.2 million of debt in fiscal 2013, the company now has the flexibility to pay at ease.

Recently, Constellation Brands ended its fiscal 2012 with a healthy balance sheet and cash flows. During the fiscal, Constellation generated $784.1 million of cash from operations compared with $619.7 million in the previous year.

Apart from this, the company achieved a record free cash flow of $715.7 million. This enabled the company to reduce debt, as well as fund stock repurchases and acquisitions. Moreover, the company anticipates generating a free cash flow in the range of $425 million to $475 million during fiscal 2013.

Our Recommendation

Constellation Brands is the largest wine company in the world and commands a dominant position in the premium wine segment in the U.S. The company is also a leading producer of wines in Canada and New Zealand. This provides a competitive edge to the company and bolsters its well-established position in the market.

Moreover, we believe that the company’s strategic initiative of expanding footholds in the U.S wine industry along with focus on brand building and promotion will accelerate its growth opportunities while strengthening its market position. Moreover, in an effort to generate strong margins, Constellation Brands is also focusing on higher priced segment across all key categories.

However, the company faces intense competition from other well-established players in the industry, including Beam Inc. ( BEAM - Snapshot Report ) , Brown-Forman Corporation – B ( BF.B - Analyst Report ) and Diageo plc ( DEO - Analyst Report ) . Moreover, Constellation Brands also encounters competition from local and regional players in the respective countries. Consequently, this may dent the company’s future operating performance.

We currently have a Zacks #3 Rank (short-term Hold rating) on the stock. Our long-term recommendation on the stock remains Neutral.