Constellation Brands – You Buy The Wine, Now Consider Buying The Debt

Constellation Brands

Constellation Brands

In “’High-Yield’ Bonds Are Anything But at Today’s Yields,” I mentioned a Constellation Brands’ Ba1/BB+ rated 4.25% coupon 2023 maturing CUSIP I would be interested in owning at higher yields. In today’s ultra-low interest rate environment, I often find myself spending more time looking at double-B and triple-B-rated corporate bonds in search of the right combination of yield, duration, and credit risk for my portfolio.


Even when yields are not at levels I find attractive, I still search for bonds to add to my watch list, so when yields rise (whether market-wide or only on a select few individual issues), I am ready to immediately take advantage of the opportunities that will then present themselves. One such example is the Constellation Brands 4.25% coupon 2023 maturing notes.

Constellation Brands, which describes itself as the “world’s leading wine company,” was founded in 1945 in Canandaigua, New York. The company has a portfolio of well-known wine, beer, and spirits brands, including Robert Mondavi, Kim Crawford, Clos du Bois, Corona, and Svedka Vodka, among others. The 10-year Constellation Brands notes I am interested in have a 4.25% coupon, are senior unsecured, and mature on May 1, 2023. The $1.05 billion offering of the notes settled on May 14, 2013 and was part of a larger $1.55 billion offering. The CUSIP for the Ba1/BB+ rated notes is 21036PAL2.

Here are several additional important details from the prospectus supplement:

  1. The notes pay interest semiannually on May 1 and November 1 of each year. If either of those dates is ever not a business day, interest will be paid on the following business day. Interest on the notes began to accrue on May 14, 2013.


  1. Interest payments are “fully and unconditionally guaranteed by the subsidiaries that are guarantors under [the] senior credit facility, provided that the guarantee of a subsidiary guarantor will be released to the extent such subsidiary guarantor is released as a guarantor under [the] senior credit facility or the facility (or a successor thereto) is amended, refinanced, extended, substituted, replaced or renewed without such subsidiary guarantor being a guarantor of the indebtedness thereunder, or if [the] senior credit facility is otherwise terminated or the requirements for legal or covenant defeasance or to discharge the indenture have been met.”


  1. There is a make whole call at the applicable Treasury rate plus 50 basis points.


  1. A conditional call called a “Special Mandatory Redemption” also exists. The call price is the “public offering price” of the notes (100 cents-on-the-dollar). The specific language of the conditional call can be found on page S-50 of the prospectus supplement. To summarize, the notes can be called up to December 30, 2013 if certain acquisitions have not been completed or if Constellation Brands determines that the acquisitions cannot be completed without changing the purchase agreements in a way that adversely affects holders of the 2021 or 2023 notes. The acquisitions in question are the signed definitive agreements to acquire “the 50% ownership interest in Crown it does not own, Grupo Modelo’s Piedras Negras brewery, and an irrevocable, fully-paid license to produce and exclusively import, market and sell the Modelo Brands and certain extensions in the U.S.” As an aside, according to the prospectus supplement, once these acquisitions are completed, Constellation Brands will be the “third largest producer and marketer of beer for the U.S. market and the largest multi-category supplier (wine, spirits and beer) of beverage alcohol in the U.S.”


  1. In order to ensure there are sufficient funds available to exercise the conditional call outlined above, Constellation Brands was required to place an amount of money equal to the aggregate public offering prices of the notes (2021 and 2023 issues) in an escrow account. If the “Special Mandatory Redemption” occurs, the escrowed funds will be used to redeem the notes.


  1. There is a conditional put for a change of control at 101% of the principal amount of the notes to be repurchased. The prospectus supplement also includes the following interesting language concerning the definition of a change of control: “The definition of Change of Control includes a phrase relating to the sale, transfer, assignment, lease, conveyance or other disposition of ‘all or substantially all’ of our property. Although there is a developing body of case law interpreting the phrase ‘substantially all,’ there is no precise established definition of the phrase under applicable law. Accordingly, if we and our subsidiaries, considered as a whole, dispose of less than all of our property by any of the means described above, the ability of a holder of notes to require us to repurchase its notes may be uncertain. In such a case, holders of the notes may not be able to resolve this uncertainty without resorting to legal action.”


  1. The prospectus supplement outlines several risks associated with the notes. While all risks are important, I would like to highlight two: First, Constellation Brands’ ability “to make payments on the notes depends on [its] ability to receive dividends from [its] subsidiaries, and not all of [its] subsidiaries are guarantors of the notes.” As of February 28, 2013, approximately 89% of the company’s tangible assets were held by its subsidiaries, and approximately $608.8 million of the company’s net sales were from subsidiaries that are not guarantors of the 2021 and 2023 maturing notes. The $608.8 million represents approximately 21.77% of the company’s consolidated net sales as of the end of fiscal year 2013. The second risk relates to the conditional put for a change of control. As the prospectus supplement states, the “senior credit facility currently also provides that certain change of control events constitute a default . . . If we experience a change of control that triggers a default under our senior credit facility, such default could result in amounts outstanding under our senior credit facility being declared due and payable. We would be prohibited from purchasing the notes unless, and until, such time as our indebtedness under our senior credit facility was repaid in full. There can be no assurance that either we or our subsidiary guarantors would have sufficient financial resources available to satisfy all of our or their obligations under our senior credit facility and these notes in the event of a change of control.”

In the aforementioned article, “’High-Yield’ Bonds Are Anything But at Today’s Yields” (linked above), I noted that the Constellation Brands 4.25% 2023 maturing notes’ then-current yield-to-maturity of 3.884% was simply too low for me to consider making a purchase. But lately the yield has been getting more attractive. Based on Monday’s closing offer price, the yield-to-maturity for the notes was 4.157%. The 27.3 basis points rise in the notes in six trading days compares to a rise of just six basis points in the 10-year Treasury during the same time period. If that type of spread widening (approximately 21 basis points in six trading days) continues over the coming days or weeks, those interested in purchasing Constellation Brands debt might be surprised by how soon an opportunity presents itself.

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