RPT-Fitch assigns Coca-Cola Icecek's prospective issue 'BBB(EXP)' rating
Sept 16 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Turkey-based Coca-Cola Icecek A.S.'s (CCI; BBB/Stable) planned bond issue an expected senior unsecured rating of 'BBB(EXP)'. The rating is aligned with CCI's Long-term Issuer Default Ratings (IDR). The final rating for the bonds is contingent upon receipt of final documents conforming to information already received by Fitch.
The planned USD denominated bond will be raised by the holding company Coca-Cola Icecek A.S. Similar to the USD300m private placement it issued earlier this year, it will not benefit from guarantees from the company's subsidiaries and will rank as a senior unsecured obligation pari passu with its other financial debt. It will also benefit from a change of control and a cross-acceleration clause. We caution that the definition of principal subsidiary does not currently capture in the cross acceleration clause the debt of any of the company's foreign operations, such as Coca-Cola Beverages Pakistan Ltd. However, as the business of the foreign operations grows, there is scope in future for the larger ones, such as Coca-Cola Beverages Pakistan Ltd, to fall into the relevant thresholds set by the definition.
KEY RATING DRIVERS
Pari Passu Debt
CCI is targeting sizing its issue at an amount sufficient to cover all of its debt maturing in 2014. In addition to achieving a substantial improvement in its liquidity position, the issue will also enable CCI to shift the majority of its debt to the holding company Coca-Cola Icecek A.S., thus reducing any structural subordination among its debt instruments. Whilst as of end June 2013 this company was the borrower of approximately two-thirds of group debt, pro-forma for the bond issue the main other borrower in the group besides CCI will be the Pakistan joint venture.
Prior Ranking Debt
The debt of Coca-Cola Beverages Pakistan Ltd - which is 49.49% but fully consolidated - and other operating subsidiaries should account for no more than approximately 20% of CCI's consolidated debt post bond issuance. Although not all guaranteed by CCI, Fitch considers the debt of these operating subsidiaries as ranking ahead of debt of the holding company. Prior ranking debt will however be viewed as negligible due to the fact that overall it should account for only approximately 0.2x EBITDA, which is well under the threshold of 2x considered by Fitch as critical to determine subordination issues.
Strong Coca-Cola Bottler
CCI is the sixth-largest independent bottler in the Coca-Cola system and a key vehicle for The Coca Cola Company Inc.'s (TCCC, A+/Stable) expansion into the Middle East and Central Asia. Since 2007, CCI has been investing heavily in terms of capex and M&A to grow TCCC's franchise in these regions. Thanks to strong and growing cash flow from operations, these investments have had limited adverse effects on CCI's credit metrics. The ratings reflect the resilience of CCI's results to economic cycles and the company's leverage policy to maintain a net debt/EBITDA ratio of around 1.5x-2.0x.
Volumes, Mix Drive Growth
CCI's performance should continue to benefit from consistent volume and price growth, driven by a young population, relatively low soft drinks penetration in its countries of operations and the ability to push sales growth, particularly in Turkey, on the more profitable "immediate consumption" channel. Although volume growth has been easing in Turkey since 2011, EBITDA has maintained growth rates of at least high single digits. Moreover, rapid expansion of its international business has enabled an improvement in profit margins driven by greater scale and operating efficiencies achieved. We expect CCI's international presence to remain a key underpinning factor of the group's profitability in 2013.
In 2012 consolidated net revenue per case (+7.3% in Turkey and +2% in the international segment) increased by 8.6% mainly due to higher prices and better packaging and category mix. Better quality of sales together with lower costs from 2011's highs, contributed to an improved EBITDA margin in 2012 of 16.2%, the highest level since 2009 and more in line with the profitability shown by other Coca-Cola bottlers.
Should this debt issue not proceed, Fitch believes CCI has access to multiple sources of funding. Liquidity was supported by cash of TRY615m at end-Q213, approximately USD900m and USD500m in undrawn foreign exchange and uncommitted bank lines, respectively, as well as strong relationships with both local and international banks.
While the majority of CCI's debt denominated in dollars and euros at end-June 2013, cash flow remains generated mainly in Turkish lira. However, this depends on the EBITDA contribution of the international segment, which is growing. The company will consequently remain vulnerable to unexpected and/or sharp depreciation of the lira. CCI has proven its ability to recover its targeted credit metrics after periods of sharp TRY depreciation, as in 2011.
Ratings Incorporate Implied TCCC Support
The ratings include embedded support from TCCC due to its influence over major decisions, moderate operational and strategic ties (CCI represents an entry point to fast-growing markets) and demonstrated operational support and oversight.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
A material permanent deterioration in free cash flow (FCF) generation or large acquisition leading to lease-adjusted net debt/EBITDAR above 2.5x and funds from operations (FFO) adjusted net debt above 2.8x-3.0x for an extended period along with FFO interest coverage below 6x.
In addition, CCI's rating could be downgraded should Fitch perceive that CCI has become strategically or operationally less significant to TCCC.
In the event of a sharp devaluation of the Turkish lira, Fitch will examine the group's willingness and timing to undertake any necessary cash preservation measures such as dividend and capex reduction (as observed in 2009).
Positive: As the highest rated corporate in Turkey, an upgrade of the IDRs is unlikely due to CCI's limited scale, diversification and forex exposure.
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