MONTERREY, Mexico--Fitch Ratings has affirmed the ratings of Coca-Cola FEMSA, S.A.B. de C.V. (KOF) as follows:
--Long-term foreign currency Issuer Default Rating (IDR) at 'A';
--Long-term local currency IDR at 'A';
--National scale long-term rating at 'AAA(mex)';
--National scale short-term rating at 'F1+(mex)';
--Senior notes for USD1 billion due 2018 at 'A';
--Senior notes for USD500 million due 2020 at 'A';
--Senior notes for USD900 million due 2023 at 'A';
--Senior notes for USD600 million due 2043 at 'A';
--Certificados Bursatiles for MXN7,500 million due 2023 at 'AAA(mex)'.
The Rating Outlook is Stable.
KOF's ratings reflect its strong business position as the largest franchise bottler of Coca-Cola products in the world, with operations across Mexico, Brazil, Colombia, Argentina, Venezuela, Central America and the Philippines. The ratings also incorporate the company's expected gradual improvement in leverage, combined with consistent free cash flow (FCF) generation and ample liquidity across the business cycle. Fitch acknowledges the company's strategic relationship with The Coca-Cola Company (KO; rated 'A+'/Outlook Stable); however, its ratings are viewed on stand-alone basis.
The ratings are constrained by the competitive pressures in the beverage industry, cost volatility of its main raw materials, foreign exchange exposure to local currencies of the countries where it operates, higher debt levels and potential changes in tax laws that could result in increases in taxes on sugary beverages.
KEY RATING DRIVERS
Strong Business Position
KOF's strong business position is supported by an extensive and well-developed distribution network, solid brand equity of Coca-Cola products, diversified product portfolio and solid execution at the point of sale. Fitch believes these factors provide a competitive advantage among competitors. In addition, the company has implemented initiatives to protect its markets shares in a difficult economic environment by increasing the offering of returnable presentations and the number of value-added transactions. Fitch considers KOF as well positioned to protect its business and maintain a leading market position in its territories over the long term.
KOF's geographical diversification contributes to lower business risk and cash flow volatility. Weakness in operating performance from operations in South America during 2015, mainly from Brazil and Venezuela (21% and 7% of total volume), has been partially compensated by better results from Mexico and Central America. Fitch expects pressure in Brazil and Venezuela to continue as a result of their negative economic environment. For the last 12 months (LTM) ended Sept. 30, 2015, the Mexico and Central America division represented 56%, 51% and 66% of the total consolidated volume, revenues and EBITDA of KOF, respectively, while the remaining came from the operations in South America.
Operating Performance Challenged
KOF's operations are expected to continue facing a challenged environment due to macroeconomic headwinds in South America and foreign exchange volatility. During the first nine months ended Sept. 30, 2015, KOF's total volume remained flattish at 2.5 billion unit cases and revenues decreased 11% to MXN109 billion when compared to the same period last year. The revenue decline was driven mainly by the translation of Venezuelan operations using the SIMADI exchange rate and the depreciation of Latin American currencies against the U.S. dollar, particularly, the Brazilian real and Colombian peso. On a comparable basis, revenues increased 8%. In terms of profitability, the EBITDA margin during 2015 improved to 20% from 18.8%, due to pricing initiatives, hedging strategy and cost reductions.
Gradual Leverage Reduction
Fitch expects that KOF's gross leverage and net leverage will gradually strengthen in the next 18 to 24 months to around 1.5x and 1.3x, respectively, when taking into consideration KOF's hedged debt position. In addition, Fitch incorporates higher EBITDA generation and/or debt reduction. As of Sept. 30, 2015, the company's total debt excluding hedges calculated by Fitch was MXN74.3 billion (USD4.4 billion) versus MXN60.2 billion (USD3.5 billion) including hedges. The benefit of this position comes mainly from the debt in USD hedged to BRL and MXN. For the LTM as of Sept. 30, 2015, KOF's gross leverage including hedges was around 2.0x, while net leverage was 1.4x.
KOF's ratings incorporate the consistent FCF generation over the business cycle that provides financial flexibility. The company's FCF calculated by Fitch has averaged MXN4.5 billion in the last four years. For 2015, Fitch estimates that KOF's FCF will be at lower levels than average due to the decline in reported revenues and EBITDA. However, Fitch estimates that the company will have the capacity to generate annual FCF over MXN2 billion in 2016-2017. For the first nine months of 2015, KOF's FCF calculated by Fitch was MXN5.1 billion after covering capex of MXN6.6 billion and MXN3.2 billion of dividend payments. The company's expected capex and dividends for 2015 are around MXN10.8 billion and MXN6.2 billion, respectively.
Fitch's key assumptions within the rating case for KOF include:
--Revenue growth flattish in 2015 and around 5% in 2016-2017;
--EBITDA margin around 19.6% in 2015-2017;
--FCF generation of over MXN2 billion in 2016-2017;
--Total debt-to-EBITDA and net debt-to-EBITDA close to 1.5x and 1.3x, respectively, in the next 18 to 24 months, including the effect of hedged debt.
Fitch does not foresee any positive rating action over the medium term.
Negative ratings actions could be triggered by the combination of one or more of the following:
--Deterioration in operating performance and profitability leading to negative FCF through the business cycle;
--Significant debt-financed acquisitions;
--Lack of strengthening in gross and net leverage towards 1.5x and 1.3x, respectively, in the next 18 to 24 months; including the effect of hedges;
--Several notch downgrade in Brazil's sovereign ratings could also pressure KOF's ratings.
KOF's liquidity position is ample. As of Sept. 30, 2015, the company's cash balance was MXN17.4 billion with short-term debt of MXN5.5 billion. In addition, KOF reduced its exposure to the cash maintained in Venezuela compared to 2014. Around 8% of its consolidated cash position is in this country. Fitch considers the company's 2016 and 2017 respective debt amortizations of MXN5.6 billion (USD332 million) and MXN1.4 billion (USD85 million) to be manageable. KOF's next significant debt maturity is in 2018 for USD1 billion. Fitch believes KOF has ample access to capital markets and credit facilities which provide additional financial flexibility.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Metodologia de Calificaciones de Corto Plazo para Empresas No Financieras (pub. 19 Dec 2014)
Metodologia de Calificacion de Empresas no Financieras (pub. 19 Dec 2014)
National Scale Ratings Criteria (pub. 30 Oct 2013)
Dodd-Frank Rating Information Disclosure Form