Fitch Initiates 'BB' IDR For Constellation Brands; Outlook Stable.

NEW YORK -- Fitch has initiated rating coverage of Constellation Brands, Inc. (NYSE: STZ) as follows:

-- Issuer default rating 'BB';

-- Bank credit facility 'BB';

-- Senior unsecured notes 'BB';

-- Senior subordinated notes 'BB-'.

The Rating Outlook is Stable. Approximately $2.9 billion of debt is covered by these actions.

The ratings reflect STZ's leading market position and broad portfolio of wine, beer and spirits in diversified global markets. STZ has pursued a strategy of growth through acquisitions financed primarily through debt. Recent major acquisitions include BRL Hardy Ltd. (BRL Hardy) for $1,400 million in 2003, Robert Mondavi Corp. (Robert Mondavi) for $1,355 million in 2004, and a 40% interest in Ruffino (Ruffino), an Italian wine company, for $89 million in December 2004. STZ also recently made an estimated $1.2 billion hostile bid to acquire Vincor International Inc. (Vincor), which was to be financed entirely with debt. But after a sweetened bid was rejected by Vincor, Constellation let its bid expire, arguably demonstrating certain financial discipline.

STZ has an excellent track record of integrating acquisitions. STZ has applied cash flow to support capital spending and debt paydown. However, total debt has increased as a result of successive acquisitions financed primarily with debt, with a significant increase in interest expense. Over the long term, it is likely that STZ will continue to make acquisitions that could result in financial and operational stress. Even under its high debt burden (total debt at Nov. 30, 2005, was approximately $2.9 billion), STZ has generated significant free cash flow in each of the past three years, with approximately $183 million in the last nine months ended Nov. 30, 2005. The Stable Rating Outlook allows for the current leverage and the high likelihood for future debt financed acquisitions. Materially higher leverage due to the financing of such acquisitions could negatively impact STZ's ratings. In the past, STZ has been very successful at finding synergies and paying down debt with its strong cash flow generating assets.

STZ's contract as an importer for Grupo Modelo S.A. de C.V.'s (Grupo Modelo) beers, including Corona, for the western United States is up for renewal at the end of 2006. Corona Extra is the No. 1 imported beer in the United States. The Grupo Modelo contract is the primary source of revenue for Constellation's beer segment and represents approximately one-quarter to one-third of consolidated operating income. The Gambrinus Company (Gambrinus) is currently the importer for the eastern United States.

Grupo Modelo has informed Gambrinus that the importer agreement would not be renewed after Dec. 31, 2006. Gambrinus is currently in arbitration proceedings with Grupo Modelo, challenging the Dec. 31, 2006 termination clause in its contract with Grupo Modelo. If Grupo Modelo succeeds in the arbitration with Gambrinus, it is unknown whether Grupo Modelo would negotiate an agreement with another importer such as STZ for the eastern United States or create its own import company. Grupo Modelo is also part-owned by Anheuser-Busch Companies Inc. (Anheuser-Busch, with a 50.2% non-controlling stake). To date, Fitch believes STZ has performed adequately under its contract with Grupo Modelo. Historically this contract has been renewed, and there is no indication that this contract will not be renewed, nevertheless it is a risk.

STZ's leverage, as defined by debt to Operating EBITDA and FFO Adjusted Leverage, was 3.6 times (x) and 4.0x, respectively, for the LTM ending Nov. 30, 2005, improving from 4.8x and 5.5x, respectively, for fiscal year 2005, but little changed from 3.3x and 4.3x, respectively, for fiscal year 2004. Interest coverage, as defined by Operating EBITDA/interest and FFO Interest Coverage was 4.3x and 4.1x for the 12 months ending Nov. 30, 2005, little changed from 4.9x and 4.5x, respectively, for fiscal year 2005, and from 4.2x and 3.5x, respectively, for fiscal year 2004. Constellation also has five year interest rate swap agreements on $1.2 billion of STZ's floating-rate bank debt totaling just under $2 billion, fixing LIBOR at an average rate of 4.1% effective March 1, 2006. The decline in leverage ratio from fiscal 2004 was driven by the effect of the debt issued to fund recent acquisitions, but with marked improvement from fiscal 2005 due to debt paydown.

As of Nov. 30, 2005, STZ had a liquidity position of approximately $391 million, consisting primarily of $365 million in revolving loans available to be drawn. It should be noted that the existing $2.9 billion credit facility also has an expansion component for up to $300 million in uncommitted term loans subject to certain terms and conditions. STZ currently has $200 million of senior notes due in August 2006 and $33 million of required bank debt repayments through the fiscal year ending Feb. 28, 2007. With strong free cash flow expected to continue, STZ has adequate financial flexibility to meet these near-term maturities and its capital requirements.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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. The ratings above have been initiated by Fitch as a service to investors. The issuer did not participate in the rating process other than through the medium of its public disclosure.