October 10, 2017 / 9:01 PM / 9 months ago

Fitch Affirms The Central America Bottling Corp. at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) MONTERREY, October 10 (Fitch) Fitch Ratings has affirmed The Central America Bottling Corporation's (CBC) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB+'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. The affirmation reflects Fitch's expectation that the company will maintain its solid business position in core markets, adequate leverage metrics across the business cycle, and that potential investments or acquisitions will not materially alter its capital structure. KEY RATING DRIVERS Solid Business Position in Core Markets: CBC's ratings reflect its business position as an anchor bottler of PepsiCo, with operations in Central America, the Caribbean, Ecuador, Peru and Argentina. The company possesses a diversified beverage portfolio of PepsiCo and proprietary brands combined with a broad distribution network that contribute to supporting its business position over the long term. CBC's main markets are Guatemala and Ecuador, representing around 44% and 13% of its total EBITDA, respectively. In addition, the operation of LivSmart in El Salvador, which exports juices and nectars to the countries where the company operates, contributes 16% of the total EBITDA. Growth Supported by Acquisitions: Fitch expects CBC's revenues will grow in the low single digits in 2017-2018, while its EBITDA margin should remain relatively stable at around 13%-14%. Growth in revenues will be mainly supported by consolidating full-year results of Argentina, recovery of sales in Ecuador, and organic growth in Guatemala. In the first half of 2017, CBC faced challenges in its operations such as lower volume in the carbonated soft drink (CSD) category, due to higher sale prices, combined with Peru's bad weather conditions and the loss of distribution of AmBev's beers. This led to volume declining around 3% and revenues increasing close around3%, versus the same period of 2016. Temporarily Higher Gross Leverage: For 2017, Fitch projects CBC's total debt/EBITDA and total adjusted debt from rent/EBITDAR will be around 3.3x and 3.6x, respectively, and then should gradually decrease to around 3.0x and 3.4x in the next 12-18 months. In terms of net leverage, Fitch expects total net debt/EBITDA and total adjusted net debt/EBITDAR to remain low at around 1.5x and 2.0x, respectively. As of June 30, 2017, CBC's total debt was USD775 million excluding USD95 million of a loan structure that the company implemented for its operations in Central America. Positive FCF: Fitch expects CBC's positive FCF trend to continue over the midterm and for 2017-2018 it will be around USD8 million annually considering an average capex of USD106 million and dividends of USD40 million. In 2016, CBC had FCF estimated by Fitch of USD6 million after covering capex of USD107 million and dividends of USD37 million. Exposure to Guatemala's Sovereign Ratings: Fitch considers in CBC's ratings a higher weight of Guatemala's sovereign rating (BB/Stable) as it is the company's main market in terms of consolidated revenues (34%) and EBITDA (44%). Fitch also believes the company's operating performance is more likely to depend on the stability and economic development of this country. While downgrades in Guatemala's ratings will likely result in negative pressures on CBC, we also believe that deterioration in Ecuador's economic and political environment would be viewed as negative for the company's ratings. DERIVATION SUMMARY CBC's ratings at BB+ are below other beverages peers in the region such as Arca Continental, S.A.B. de C.V. (A/Stable), Coca-Cola FEMSA, S.A.B. de C.V. (A-/Stable) or Embotelladora Andina S.A. (BBB+/Stable) given its lower size and scale and weaker competitive position of PepsiCo and proprietary beverage brands when compared to the stronger brand equity of Coca-Cola products. Also, the company's ratings reflect its lower profitability margins and higher exposure to lower-rated countries. CBC's ratings are above other beverage companies such as Grupo Atic (B-/Stable) given its better operating performance, adequate leverage metrics and ample liquidity. No country ceiling, parent/subsidiary or operating environment aspects affect the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Revenue growth of 2% in 2017 and 4% in 2018; --EBITDA margins around 14% in 2017 and 2018; --Positive FCF generation in 2017-2018; --Total adjusted debt/EBITDAR and total adjusted net debt/EBITDAR at around 3.4x and 2.0x, respectively, by 2018. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Fitch does not foresee positive ratings actions for CBC in the mid-term; however, the combination of lower leverage ratios, better operating performance, solid FCF generation across the cycle, and cash flow generation from investment-grade countries will be considered positive to credit quality. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -CBC's ratings could be negatively pressured by the following factors: a downgrade in Guatemala's or Ecuador's country ceiling or sovereign ratings, deterioration of its operating results, negative FCF generation, or significant debt-financed acquisitions that result in total debt/EBITDA or total adjusted debt/EBITDAR higher than 3x and 3.5x, respectively, on a sustained basis. LIQUIDITY Ample Liquidity: As of June 30, 2017, CBC's liquidity is ample given its current cash position of USD345 million and USD91 million of short-term debt. Its next debt amortizations are USD29 million in 2018, USD15 million in 2019, USD106 million in 2021, and USD533 million after 2021. Fitch believes CBC has financial flexibility to face its debt amortization in the short- and long-term. FULL LIST OF RATING ACTIONS Fitch affirmed the following ratings of CBC: -Long-Term Foreign Currency IDR 'BB+'; -Long-Term Local Currency IDR 'BB+'; -USD500 million senior unsecured notes due in 2027 'BB+'. The Rating Outlook is Stable. Contact: Primary Analyst Rogelio Gonzalez Director +52-81-8399-9100 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 +52-81-8399-9100 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor: --Operating leases are treated as debt-like obligations and gross rent expense is capitalized using a multiple of 8x. --Debt is adjusted by the loan structure the company implemented for its operations in Central America. 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