DBRS, the Canadian credit rating agency, has downgraded the commercial paper rating for Allied Domecq Canada, based upon the parent company, to R-1 (low), despite saying that Allied has made "positive strides in transitioning its business over the past few years".

DBRS said that the downgrade reflected concerns that Allied has "pursued and is expected to continue to pursue select acquisitions that may singularly or in aggregate, raise debt levels and weaken the balance sheet".

The agency went on to say it was worried that Allied's desire to grow scale and brand portfolio will weaken coverage ratios beyond acceptable credit standards, despite the management's confidence to operate with higher future leverage and an evolving brand portfolio.

DBRS is also concerned that after Allied's failure to acquire the Seagram wine and spirits business it may now be seen in a relatively weaker competitive position.

DBRS said: "With Diageo's critical mass and an improving third-tier set of competitors, DBRS is also concerned that competitive levels in the industry may intensify once integration of these acquisitions is complete. [Allied's] potential transactions may have considerable benefits but these may be some time in coming and will raise integration risks in the meantime."

However DBRS also accepted that Allied had made positive moves in restructuring its business in recent years and that results should remain consistent with the highly profitable and stable spirits and wine division now accounting for 90% of turnover and EBIT.

"Credit measures are enhanced by the brand portfolio's strength, its reasonable geographic distribution and the overall stability of the spirits industry," said DBRS. "Further, Allied has improved its ability to generate strong and steady free cash flow without the capital-intensive pub network."