Brown-Forman Corporation's (Brown-Forman) 'A' Issuer Default Rating (IDR) is not affected by the $1 billion incremental share repurchase program recently approved by the company's board of directors, according to Fitch Ratings.

If fully executed, the new share repurchase program, which is effective April 1, 2016 to March 31, 2017, returns an approximate $225 million more to shareholders through fiscal 2017 than Fitch contemplated in its previous financial forecast. Given an expected $544 million of proceeds from the pending divestiture of Southern Comfort and internally generated FCF, incremental debt could be required causing leverage to increase and removing room in existing ratings.

Fitch estimates leverage (debt/EBITDA) of approximately 1.6x at the end of FY2016, will increase to 1.9x-2.0x range by the end of FY2017. On a funds from operations (FFO) basis, Fitch expects FFO adjusted leverage of approximately 2.5x at the end of FY2016, increasing to 2.8x-2.9x range by the end of FY2017.

In March 2015, Brown-Forman authorized a new stock repurchase program of up to $1 billion that is available through March 24, 2016. Share repurchases totaled $744 million for the six months ended Oct. 31, 2015. Fitch expects Brown-Forman will fully complete the existing share repurchase program.

Brown-Forman's ratings are supported by the sizeable operating earnings and consistent cash flow generation that is derived from the strong and competitive brand portfolio of one of the largest worldwide spirits companies. Major contributors to Brown-Forman's operating earnings are its Jack Daniel's franchise, which is the fourth-largest premium spirits brand and the largest selling American whiskey brand in the world including its highly successful line extensions, Tennessee Honey and Tennessee Fire.

Brown-Forman's spirits portfolio primarily competes in the premium and super premium categories and skews toward American whiskeys. Fitch views this as a competitive strength, because the aging process and inventory investments required are a barrier to entry providing an impediment particularly for value competition. Brown-Forman spirits have taken share from beer and clear spirits with the favorable demand trends driven by flavored and higher-end American whiskey.

As such, Brown-Forman has experienced strong category momentum for Jack Daniel's Tennessee Honey and the higher-priced Woodford Reserve family with depletion volume growth at 12% and 26% respectively during the first half of fiscal 2016. The Jack Daniel's Tennessee Fire line extension experienced underlying net sales growth of 30% through the same time period. Industry demand trends should remain strong for the foreseeable future that when coupled with Brown-Forman's portfolio would allow the company to grow at above average rates for the next several years.

Brown-Forman's cash balances, stable FCF generation and substantial credit facility capacity provides good liquidity. As of Oct. 31, 2015, Brown-Forman had $195 million of cash with $140 million offshore. FCF for the past 12 months was $310 million. FCF is expected to be at least $250 million annually for the next three years as organic growth in the mid-single digit range and expected decreases in capital spending offset the loss in cash flow from the Southern Comfort brand.

The company has not drawn on its $800 million five-year credit facility that matures in November 2018, which can be expanded by $400 million. The credit facility is primarily used to support the company's $1 billion commercial paper program. Commercial paper borrowings were $295 million for the quarter ended Oct. 31, 2015 which leaves available capacity on the credit facility of $505 million. The credit facility includes an interest coverage financial maintenance covenant of 3.0x.

Brown-Forman maintains a very manageable maturity profile with approximately $250 million coming due in 2016 and $250 million in 2018. Fitch expects the 2016 maturity will be refinanced.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

Positive rating actions are not anticipated in the intermediate term given the increase in leverage but could occur on continued strong operating performance driven by the Jack Daniel's Brand Family combined with:

--Decreased leverage such that total debt-to-operating EBITDA below 1.5x;

--FFO adjusted leverage in the low 2.0x on a sustained basis.

Any potential ratings upgrade however would be limited given Brown-Forman's dependence on the Jack Daniel's franchise.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Total Debt to EBITDA sustained above 2.0x;

--FFO adjusted leverage sustained above 3.0x;

--FCF margin sustained below 5%;

--A material leveraging transaction;

--Further aggressive shareholder-based initiatives;

--A significant and sustained loss of market share for the Jack Daniel's brand.

Fitch currently rates Brown-Forman as follows:

--Long-term Issuer Default rating (IDR) 'A';

--Short-term IDR 'F1';

--Commercial paper 'F1';

--Senior unsecured notes 'A';

--Bank credit facility 'A'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

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