-- Mexico-based Coca-Cola Femsa is planning to acquire 51% of Coca-Cola Bottlers Philippines Inc.
-- We are affirming our ‘A-’ global scale and ‘mxAAA’ national scale long-term corporate credit and debt ratings on the company.
-- The stable outlook reflects our expectation that the company will keep generating robust cash flow and preserve its strong key credit metrics and liquidity during the next two years.
On Dec. 18, 2012, Standard & Poor’s Ratings Services affirmed its ratings on Coca-Cola Femsa S.A.B. de C.V. (KOF), including the ‘A-’ global scale and ‘mxAAA’ national scale corporate credit ratings. The outlook is stable.
On Dec. 13, 2012, KOF announced that it signed a definitive agreement with The Coca-Cola Co. (TCCC; AA-/Stable/A-1+) to acquire 51% of Coca-Cola Bottlers Philippines Inc. (CCBPI) for $688.5 million. KOF expects to finance the transaction through $700 million of short- and medium-term bilateral bank loans. We believe this additional debt won’t weaken KOF’s credit metrics and financial risk profile, given the company’s current cash flow generation and strong liquidity. We also consider this transaction as part of KOF’s strategy to continue pursuing growth opportunities worldwide. The transaction is expected to close during the first months of 2013.
The corporate credit rating on KOF is based on its stand-alone credit profile (SACP) and the implicit support from TCCC through its 29.4% stake in KOF. The SACP on KOF is based on our assessment of its “satisfactory” business risk profile that reflects KOF’s strategic position in TCCC’s Latin American distribution system, its operations throughout the region, and the historical and relatively stable cash flow characteristics of the nonalcoholic beverage industry. The rating also reflects our expectation that the company will maintain its “modest” financial risk profile, as seen in its strong financial measures and robust cash flow generation. Intense competition, volatile raw material prices, and the country and macroeconomic risks in certain regions where the company operates partly offset the positive factors.
The global-scale rating on KOF is above the sovereign rating on Mexico (foreign currency: BBB/Stable/A-2; local currency: A-/Stable/A-2). We stress tested KOF under a Mexican sovereign default scenario. Under this scenario, we sensitized the company for a decline in consumer spending and a sharp devaluation of the Mexican peso, hurting the company’s sale volumes, cost structure, and financing costs, which translates into a significant decline in revenues and EBITDA. Under this scenario, we concluded that the company would still be able to generate sufficient cash flow to service its debt obligations.
Our senior unsecured debt rating on KOF is the same as the corporate credit rating, reflecting the upstream guarantee from Propimex S.A. de C.V., KOF’s main operating subsidiary in Mexico, which mitigates KOF’s structural subordination relative to operating company liabilities. Following the acquisition of CCBPI, we expect Propimex to continue accounting for about 50% of KOF’s total assets, as the CCBPI’s assets will not be consolidated in KOF’s balance sheet given that this operation will be accounted under the equity method. Moreover, KOF expects to merge certain real estate companies in Mexico into Propimex during 2013, which we estimate will increase this percentage to more than 55%. We also expect KOF to transfer sales operations from the recent mergers in Mexico--Administradora de Acciones del Noreste S.A. de C.V., Corporacion de Los Angeles S.A. de C.V., and Grupo Fomento Queretano--to Propimex, increasing this subsidiary’s EBITDA. If Propimex’s assets do not continue to exceed 50% of KOF’s total assets, or this subsidiary’s EBITDA as a percentage of the company’s EBITDA does not gradually increase, we could lower the ratings on the holding company debt issues.
During the 12 months ended Sept. 30, 2012, KOF’s revenues and EBITDA increased by 28% and 18%, respectively. This growth reflected the integration of the recently acquired new territories in Mexico, higher average price per unit case, and volume growth mainly in Venezuela, Mexico, Brazil, Argentina, and Central America. For the same period, EBITDA margin was 18.7% compared with 20.5% for the same period in 2011, reflecting the depreciation of certain currencies, higher labor and freight costs in some countries, certain additional expenses in connection to commercial models, and investments related to new lines of business and categories. KOF’s key financial metrics also remained solid, as seen in an adjusted total debt to EBITDA of 0.8x, EBITDA interest coverage of 13.3x, and funds from operations (FFO) to total debt of 79.9% for the 12 months ended Sept. 30, 2012, compared with 1.1x, 12.4x, and 67.1%, respectively, for the same period in 2011. Following the acquisition in the Philippines, we expect KOF’s total debt to EBITDA to increase to 1.2x. As part of the agreement, KOF will have an option to acquire the remaining 49% of CCBPI during the seven years following the closing and will have a put option to sell its ownership to TCCC any time during the sixth year. Once the transaction is completed we will closely monitor the integration process, pro forma business position, and operating challenges.
We consider KOF’s liquidity as “strong” under our criteria. We expect the company will refinance part or all of the bilateral bank loans used to fund the CCBPI acquisition. We also expect that sources of liquidity will exceed uses by more than 1.5x during the next 12-18 months. KOF’s stable cash flow generation backs its strong liquidity.
We expect the company to keep generating solid free operating cash flow through the next few years, while maintaining similar levels of cash on hand. Instead of using committed credit lines, KOF has a policy of maintaining a minimum excess cash cushion of $300 million in available funds, on top of the $130 million it requires to operate. KOF’s covenant headroom is ample, even considering the additional debt to fund the aforementioned acquisition. Our liquidity analysis also incorporates qualitative factors, including our view that the company has the capacity to withstand high-impact, low-probability events. It also has sound relationships with banks and access to capital markets, and an overall prudent financial risk management.
The stable outlook reflects our expectation that KOF will keep generating robust cash flow and preserve its strong key credit metrics and liquidity during the next two years, despite the recently announced acquisition. We could lower the ratings if KOF’s total debt to EBITDA increases to more than 2.0x, its cash flow generation slows, or its level of implicit support declines. We could lower the debt ratings if the guarantor’s assets as a percentage of KOF’s total assets do not remain above 50%. An upgrade is possible once we have a clearer view of the integration of the Philippines’ operation and we reevaluate the company’s business risk profile.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- Credit FAQ: How Standard & Poor’s Applies Its Criteria/Methodology To Its Ratings On Coke and Coke’s Bottlers, Nov. 5, 2010
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Coca-Cola Femsa S.A.B. de C.V.
Corporate Credit Rating
Global Rating Scale A-/Stable/--
Caval - Mexican Rating Scale mxAAA/Stable/--
Senior Unsecured mxAAA
Senior Unsecured A-