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Fitch Rates Coca-Cola Southwest Beverages LLC's Proposed Private Placement Offering 'A(exp)'
November 1, 2017 / 8:32 PM / 22 days ago

Fitch Rates Coca-Cola Southwest Beverages LLC's Proposed Private Placement Offering 'A(exp)'

(The following statement was released by the rating agency) MONTERREY, November 01 (Fitch) Fitch Ratings has assigned a rating of 'A(exp)' to Coca-Cola Southwest Beverages LLC's (CCSWB) proposed private offering of senior notes for up to USD600 million due up to 2032. The company will use the proceeds to repay existing indebtedness. The planned notes will be irrevocably and unconditionally guaranteed by its parent company, AC Bebidas, S. de R.L. de C.V. (A/Stable) and will rank pari passu with all other indebtedness. The rating of the proposed private placement notes reflects the credit profile of the guarantor and Fitch's view of strong legal, operational and strategic ties between CCSWB and AC Bebidas. Fitch's ratings of AC Bebidas's take into account the solid business position of its beverage business as one of the largest bottlers of Coca-Cola products in the world with geographically diversified operations in Latin America and the southwestern U.S., combined with a solid financial position. The ratings also incorporate the strong legal and operational ties between AC Bebidas and its parent company Arca Continental, S.A.B. de C.V. (A/Stable), which holds an 80% equity stake, and its strategic relation with The Coca-Cola Company, which owns the remaining 20%. KEY RATING DRIVERS Solid Market Position in Beverages: AC Bebidas' ratings consider its solid position as the leading bottler of Coca-Cola products in northern and western Mexico, southwestern U.S., northern Argentina, Ecuador and Peru. The company's solid market shares in its main territories are supported by a diversified portfolio of products and well-recognized brands, as well as a broad distribution network, all of which provide a competitive advantage against its competitors. Fitch believes AC Bebidas' business position is sustainable in the long term by its strong brand equity, continuous innovation in products and presentations to capture consumer trends, heavy investment and execution at the point of sale and its participation in an industry more resilient to economic downturns. Balanced Geographic Diversification: Fitch views the geographical diversification of AC Bebidas' operations as a positive for the company's credit profile. on a pro forma basis Fitch estimates that EBITDA contribution per region is approximately 48% from Mexico, 29% from South America and 23% from the U.S. During 2017, the company expanded its operations to the U.S. and expects to capture synergies of around USD60 million-USD80 million over the next three years. In addition, Fitch anticipates the company will benefit from its access to hard-currency revenue and will counterbalance its exposure between mature and emerging markets, resulting in less business risk and cash flow volatility. Growth of Non-Carbonated Drinks: Fitch also considers the gradual growth of non-carbonated drinks (NCSD) in the parent company's product portfolio. While carbonated soft drinks (CSD) dominate the company's sales volume, the consumption of alternative categories such as water, juices, teas, isotonics, and juices, among others, is expected to continue growing at a faster pace than CSD. Approximately 18% of AC Bebidas' pro forma total sales volume, excluding jug water, comes from water and still beverages products. Fitch believes the company is well positioned to capture growth in these categories given its offering of products as consumer preferences move to more healthy beverages. In addition, the company has been reformulating some of its products in the CSD category by introducing alternative non-sugar presentations. Lower Profitability: AC Bebidas' pro forma profitability is expected to decline in 2017 as a result of the integration of territories in the U.S., which have lower margins, as well as pressure from higher costs related to sweetener distribution cost and concentrate, and exchange rate effects. Fitch believes the pressure on higher costs will gradually be mitigated by pricing initiatives and internal efficiencies, while the potential synergies from integrating the U.S. operations will be reflected in better margins over the mid to long term. On a pro forma basis Fitch forecasts that for 2017, including full-year results of U.S. operations, AC Bebidas' revenues will grow to around MXN142 billion and an EBITDA margin of approximately 19%. Low Net Leverage: Fitch expects AC Bebidas' net adjusted debt - by rents and factoring/EBITDAR will be close to 1.0x in the mid-term. As of Sept. 30, 2017, total adjusted debt calculated by Fitch including factoring was MXN45.5 billion. Fitch projects that pro forma for 2017 AC Bebidas' adjusted gross and net leverage will be around 1.8x and 1.5x, respectively. Theses metrics should gradually decline in the next 18-24 months to around 1.5x and 1.0x, respectively, as a result of moderate debt reduction and higher EBITDA. Strong FCF: Fitch expects AC Bebidas will maintain positive FCF over the mid-term. Fitch projects the company will have annual pro forma FCF generation capacity of over MXN4 billion in 2017-2018. In its base case projection, Fitch uses capex of MXN9.2 billion in 2017 and MXN10.4 billion in 2018, as well as annual dividends in the range of MXN3.5 billion-MXN3.7 billion, starting 2018.. DERIVATION SUMMARY CCSWB's ratings on its private placement notes are supported by the credit profile of AC Bebidas, which is well positioned relative to peers as the second-largest bottler of Coca-Cola product in Latin America and one of the largest in the world. The company's credit profile is considered stronger than other beverages companies such as Coca-Cola Femsa, S.A.B. de C.V. (A-/ Stable) and Embotelladora Andina S.A. (BBB+/Stable) given lower exposure of its EBITDA generation to countries in the 'B' or 'BB' category. Its leverage metrics are expected to be maintained at lower levels than its peers across the business cycle. The parent/subsidiary linkage was applied by Fitch, as AC Bebidas has strong legal and operational ties with its parent Arca Continental. No country-ceiling or operating environment aspects had an impact on our rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for AC Bebidas include: --Pro forma revenue of around MXN142 billion in 2017, growing at 5% in 2018; --EBITDA margin at around 19% in 2017-2018; --Capex around MXN9.2 billion in 2017 and MXN10.4 billion in 2018; --Annual FCF over MXN4 billion in 2017-2018; --Pro forma net adjusted leverage ratio gradually decreasing to 1x in the next 18-24 months. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action Fitch does not foresee positive ratings actions for CCSWB's private placement notes over the medium term given the current rating levels of AC Bebidas. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action The ratings of CCSWB's private placement notes would be pressured by negative rating actions on its guarantor. AC Bebidas' ratings could face pressure from a combination of one or more of the following: deterioration of profitability margins below the industry's average; negative FCF through the business cycle, significant debt-financed acquisitions, or pro forma net adjusted leverage in 1.5x on a sustained basis. LIQUIDITY AC Bebidas' liquidity is sound. As of Sept. 30, 2017, the company's cash balance was MXN2.5 billion with MXN1.6 billion of short-term debt, which includes MXN1.1 billion of factoring with suppliers. Fitch believes the company will enhance its debt maturity profile following the repayment of debt with the proceeds expected from the private placement issuance of of its subsidiary, CCSB. FULL LIST OF RATING ACTIONS Fitch currently rates AC Bebidas as follows: -- Long-Term Foreign and Local Currency Issuer Default Rating 'A'; --National scale long-term rating 'AAA(mex)'; --Certificados Bursatiles local issuances 'AAA(mex)'. The Rating Outlook is Stable. Contact: Primary Analyst Rogelio Gonzalez Director +52-8399-9100 Fitch Mexico S.A. de C.V. Prol. Alfonso Reyes 2612 Monterrey, N.L., Mexico Secondary Analyst Maria Pia Medrano Associate Director +52-55-5955-1600 Committee Chairperson Alberto Moreno Senior Director +52-8399-9100 Summary of Financial Statement Adjustments - --Operating leases are treated as debt-like obligations and gross rent expense is capitalized using a multiple of 6x. --Factoring with suppliers is treated as debt. 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