(The following statement was released by the rating agency)
-- On May 11, AmBev's purchase of Dominican Republic-based beer and malt
producer and distributor CND was completed.
-- We are raising the rating CND to 'BB' from 'B+' and removing it from
CreditWatch with positive implications.
-- The stable outlook reflects our view that AmBev's strong implicit and
explicit support to CND will remain in the future.
On July 9, 2012, Standard & Poor's Ratings Services raised its rating on
Cerveceria Nacional Dominicana S.A. (CND) to 'BB' from 'B+', two notches above
the sovereign rating on the Dominican Republic. In addition, we removed the
rating from CreditWatch with positive implications, where we placed it on
April 17, 2012. The outlook is stable.
The rating action reflects the completion of AmBev - Companhia de Bebidas das
Americas' acquisition of 51% of CND, which was announced on April 16. We
believe CND is a strategically important investment for AmBev and we have
incorporated two notches of support from AmBev to our corporate credit rating
on CND. Through this transaction, Ambev will become the biggest beverage
company in the Caribbean, and we believe its operation in this region will be
highly strategic for the company. We expect AmBev to provide strong implicit
and explicit support to CND, even in a default case scenario of the Dominican
Republic. This support is evident through the recent redemption of CND's
senior unsecured notes due 2014, which the company will refinance at a lower
interest rate through a bank loan that AmBev will guarantee. We consider the
company's business risk profile as "weak" and its financial risk profile as
Additionally, we expect that CND will benefit from synergies, integration of
logistics and commercial agreements, economies of scale in raw material
sourcing and distribution, and further expansion of its brands to other
During the first three months of 2012, CND has continued to improve its
financial metrics through debt reduction and refinancing, as well as an
improvement of its EBITDA margins, thanks to a better product mix and higher
sales volumes, mainly exports. For the 12 months ended March 31, 2012, CND
posted an EBITDA margin of 29%, total debt to EBITDA of 2.3x, funds from
operations (FFO) to total debt of 29.5%, and EBITDA interest coverage of 3.4x,
compared with 26.1%, 3.2x, 19%, and 2.6x for the same period in 2011.
Under our base-case scenario, CND's revenues will increase 5% and EBITDA
margins to 35% by 2015, due to the expected synergies and cost reductions from
the AmBev's purchase. These figures will improve the company's key financial
metrics: debt to EBITDA of 2.1x, FFO to debt of 25.1%, and EBITDA interest
coverage of 5.3x by the end of 2012. Free operating cash flow is expected to
remain positive, at about Dominican peso (DOP) 2.0 billion.
Our ratings on CND reflect our view of the country and macroeconomic risk of
the Dominican Republic, the company's exposure to the country's economic
cycles, and certain foreign-currency exposure related to its
dollar-denominated debt, as most of its revenues are denominated in Dominican
pesos. The somewhat offsetting factors are the strong explicit and implicit
support from AmBev, CND's leading industry position in the Caribbean, its
strong distribution capabilities in a fragmented retailer system, solid and
longstanding brand recognition, the improving acceptance of its products in
international markets, and adequate liquidity.
We consider CND's liquidity to be "adequate" under our criteria. During the
past 12 months, CND substantially improved its debt maturity profile through
the refinancing of short-term liabilities and reduction of debt. For the
following 12 months ending March 31, 2013, sources of liquidity will likely
include cash of DOP1.121 billion and FFO of about DOP3.630 billion. Cash uses
are likely to include DOP1.784 billion in short-term debt maturities and
approximately DOP1.763 billion for working capital requirements, capital
expenditures, and dividend payments.
We expect sources of liquidity to exceed uses by 1.4x for 2012 and 1.7x for
2013, and net sources to remain positive even with a 15%-20% decline in
EBITDA. Given the company's improved financial metrics, its covenant headroom
has widened. We anticipate this comfortable buffer to remain in the next two
years with a cushion of more than 50%.
The stable outlook reflects our view that AmBev's strong support to CND will
allow it to improve its profitability and reduce its financing and operating
costs. We could lower the rating if this support does not continue, if we
downgrade the Dominican Republic, and although highly unlikely, if the
company's financial risk profile significantly weakens. Our view of country
risk and the current transfer and convertibility assessment of the Dominican
Republic constrains an upgrade.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Credit FAQ: Understanding Ratings Above The Sovereign, Aug. 8, 2011
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable
Consumer Products Industry, April 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Corporate Criteria--Parent/Subsidiary Links; General Principles;
Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating
Link to Parent, Oct. 28, 2004
Upgraded; CreditWatch/Outlook Action
Cerveceria Nacional Dominicana S.A.
Corporate Credit Rating BB/Stable/-- B+/Watch Pos/--
Senior Unsecured BB B+/Watch Pos
(Caryn Trokie, New York Ratings Unit)