TEXT-S&P assigns 'BB' CCR to Grupo Embotellador Atic; notes prelim 'BB'
-- Peru-based beverage company Grupo Atic is planning to issue $300 million senior unsecured notes to refinance its existing debt and for general corporate purposes and capital expenditures.
-- We are assigning our 'BB' long-term corporate credit rating to the company. We're also assigning a preliminary 'BB' issue-level rating to Ajecorp's proposed senior unsecured notes.
-- The ratings on Grupo Atic reflect our assessment of the company's "fair" business risk profile, "significant" financial risk profile, and "adequate" liquidity.
-- The stable outlook reflects our expectation that credit measures will remain in line with the rating, despite competitive pressures over the near term.
On May 7, 2012, Standard & Poor's Ratings Services assigned its 'BB' long-term corporate credit rating to Grupo Embotellador Atic S.L. (Grupo Atic). The outlook is stable.
At the same time, we assigned our preliminary 'BB' issue-level rating to Ajecorp B.V.'s proposed $300 million senior unsecured notes.
Our 'BB' corporate credit rating on Grupo Atic reflects our assessment of the company's "fair" business risk profile, "significant" financial risk profile, and "adequate" liquidity. Our assessment of Grupo Atic's business risk profile reflects its geographically diverse portfolio, the competitive and relatively stable cost structure due to its vertical integration of operating activities, and its proven ability to penetrate the fastest growing socio-economic segments of the countries where it operates. These factors are partially offset by a fierce competitive environment and limited brand recognition that has hindered the company's ability to increase market share, particularly in regions where consumers face low switching costs.
The company's profitability indicators have declined during the past two years, with an EBITDA of 8.5% in 2011, down from 13.5% in 2009. In our view, this is reflection not only of the challenging competitive landscape and sluggish market conditions, but also of the company's limited capacity to implement a more aggressive pricing strategy. In some of its products, Grupo Atic maintains prices approximately 40% below competition, and small increases in its cost structure could have a significant impact on its margins. For 2012, we expect that Grupo Atic will achieve increased efficiencies throughout its production process and will strengthen its distribution model, which would drive the EBITDA margin to the double-digit area.
Our assessment of Grupo Atic's financial risk profile reflects our expectations of its leverage ratio in the mid-2x area, because we believe that the company's 2012-2015 strategy to consolidate its operations would contribute to the stability of cash flow generation and mitigate liquidity pressures in the near term.
In our base-case scenario, we assume:
-- Its Peru operations' volume to increase up to 20% in 2012, resulting mainly from a product portfolio strengthening and an aggressive marketing program;
-- Revenue growth in Thailand operations of above 20% and profit margins rise by 300bps, due to changes in SKU formats; and
-- The implementation of a new production facility in Colombia that would support volume growth in excess of 15%, in 2012.
Our baseline forecast for 2012 incorporates our view that Grupo Atic's total debt to EBITDA will be 2.8x, EBITDA interest coverage 3.9x, and funds from operations (FFO) to total debt 21.1%. These metrics incorporate our expectation that the company will successfully issue the proposed notes.
The issuer of the proposed notes will be Ajecorp B.V., Grupo Atic's wholly owned subsidiary created for the sole purpose of issuing the notes. The company will use the proceeds to refinance its existing debt and for general corporate purposes and capital expenditures. Grupo Atic and its subsidiaries will jointly, severally, and unconditionally guarantee the notes. Our preliminary debt rating on the notes is the same as the corporate credit rating, reflecting the upstream guarantees from Grupo Atic's operating subsidiaries, which mitigate the company's structural subordination relative to operating-company liabilities (for our structural subordination methodology, see "Corporate Ratings Criteria 2008," published April 15, 2008, on RatingsDirect). Our preliminary debt rating is pending the completion of a legal review and the issuance of legal opinions in connection with the proposed bonds. We could lower the preliminary issue rating if we identify shortcomings in the enforceability of the guarantee package that could limit the potential claims of bondholders.
With sales of $1.25 billion in 2011, Grupo Atic is engaged in the production and distribution of carbonated soft drinks, bottled water, isotonics, tea, and other beverages. The company began operations in 1988, and currently operates in 12 Latin American countries and Thailand.
Based on its likely sources and uses of cash during the next 12-18 months, our performance expectations, and pro forma for the notes issuance, Grupo Atic has an "adequate" liquidity profile.
Relevant factors in our assessment of its liquidity profile include the following:
-- We expect its sources of liquidity during the next 12-18 months to exceed uses by at least 1.2x;
-- We expect net sources to be positive, even if EBITDA is lower than our expectations by 20% during the next 12 months;
-- Pro forma for the issuance, the company faces a smooth debt maturity profile for 2013-2016.
As of Dec. 31, 2011, Grupo Atic's liquidity sources include a cash balance of approximately $22.7 million and FFO of about $75.8 million. Under our base-case scenario, we have incorporated capital expenditures of approximately $71 million in 2012, mainly for maintenance activities at its production facilities. We believe, however, that part of the capital expenditures planned in 2012 are discretionary, and expect management to pull back on spending if operating performance is below expectations. Under our base-case scenario, we also consider that the proceeds from the notes will fully cover all scheduled debt maturities in 2012. We expect the company's cash flow generation to cover most of the annual capital investment requirements, which shall contribute to maintaining cash balances of more than $50 million.
Preliminary terms of the proposed notes issuance include a 3.5x maximum consolidated leverage ratio and 2.5x fixed-charge coverage ratio. Under our performance expectations, we believe Grupo Atic will maintain sufficient cushion for the covenants.
The stable outlook reflects our expectation that Grupo Atic will focus on consolidating its operations in the markets where it operates, which would contribute to maintaining credit measures in line with the rating, despite competitive pressures over the near term. The outlook also reflects our belief that management will actively pursue the improvement of the company's operating efficiencies to deliver double-digit EBITDA margins by the end of 2012. We expect top-line growth to exceed 5.5% during the next two years, and debt to EBITDA in the mid-2x area and interest coverage in the 4x area by the end of 2013, in line with the 'BB' rating.
We could upgrade Grupo Atic to the extent the company improves its EBITDA margin by 350-400 bps following a lower cost structure, increased market share in core markets that support sustained volume sales growth, and higher cash flow generation that contributes to a rapid improvement in the company's leverage ratios. We could lower the ratings if operating performance in 2012 is weaker than our current expectations with single-digit EBITDA margins, resulting in leverage ratios above 3.0x, or if Grupo Atic suffers a steep loss in market share in its core markets that significantly affects volume sales growth. We could also lower the preliminary issue rating if we identify shortcomings in the enforceability of the guarantee package that could limit the potential claims of bondholders.
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