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Fitch Rates Coca-Cola Icecek's Planned Unsecured Eurobond Issue 'BBB(EXP)'
September 5, 2017 / 4:47 PM / 16 days ago

Fitch Rates Coca-Cola Icecek's Planned Unsecured Eurobond Issue 'BBB(EXP)'

(The following statement was released by the rating agency) LONDON, September 05 (Fitch) Fitch Ratings has assigned Coca-Cola Icecek's (CCI) planned senior notes issue an expected senior unsecured rating of 'BBB(EXP)'. The final rating is contingent upon the receipt of final documents conforming to information already received by Fitch. Proceeds of the notes will be used to refinance the company's 4.75% notes due in 2018. The planned notes will be unguaranteed, ranking equally with all existing and future unsecured indebtedness of the issuer that is not subordinated to the notes, including that under senior credit facilities. The contemplated transaction is leverage neutral and is part of the group's liability management. KEY RATING DRIVERS Resilient Business Model: Fitch expect CCI's revenue to grow to TRY9.0 billion by 2018 with margins remaining relatively stable at around 14.8%, which compares to an average of 15.4% since 2003. As the fifth-largest bottler for TCCC, CCI's strong brands and relative pricing power lead to resilience against economic downturns and political instability. Growth stems from its high brand awareness, changing consumer tastes, increasing middle-class incomes, favourable demographics and growing economies. Strong Implied Support: CCI has a strong operational and strategic relationship with TCCC, which owns 20.1% of CCI and exercises considerable influence over major decisions; it licenses strong global brands to CCI, provides marketing expertise and also has price flexibility in its supply terms that can partly protect profits from currency fluctuations. Moreover in the absence of a formal guarantee from TCCC, we believe that CCI could rely on TCCC regarding other financial support in case of need. Fitch assesses transfer and convertibility risk as low, supported by TCCC's past record of supporting CCI and its other bottlers, especially in less developed economies. This results in a one-notch uplift, applicable to both the Local-Currency (LC) and Foreign-Currency (FC) IDRs from its standalone rating of 'BBB-'. CCI's FC IDR is limited to its LC IDR of 'BBB' and we expect the FC IDR uplift to remain at no more than one-notch from Turkey's country ceiling (currently 'BBB-'). Consumer Health Trend: Health and wellness trends have resulted in a structural shift away from the consumption of sugar sparkling soft drinks. CCI is experiencing a contraction in the volume of sparkling beverages in its core market (Turkey), where sales decreased by 2% in 2016. In contrast, the consumption of still beverages, which altogether represented 29% of 2016 group sales, increased in Turkey by 7% in 2016, an underlying trend which we expect will continue. Fitch expects CCI to address such changes in consumer preferences through innovation in its portfolio in favour of healthier alternatives, and focusing on smaller packaging sizes. Geopolitical Events Limit Growth: CCI continues to demonstrate its ability to operate under challenging conditions, consistently achieving double-digit revenue growth since 2003, apart from in 2016. We currently assume double-digit sales growth in 2017, partly driven by inflation, and high single digit sales expansion in 2018. Stable Cash-Flow Generation: FFO margin has averaged 13% over the past five years and Fitch expects it to remain steady, demonstrating the stability of the underlying business model. Over the past five years, CCI generated TRY3.9 billion in cash flow from operations and has adjusted its capex and dividends through the cycle, spending TRY3.0 billion on capex (of which about two thirds is related to expansion) and TRY355 million in dividends. We expect its FCF margin to average 4.8% to 2018. Deleveraging Capacity: We expect FFO adjusted net leverage to fall to around 1.6x by 2018 (gross leverage below 2.5x), partly resulting from expected debt repayments, but also profit expansion, demonstrating its deleveraging capacity. In our base case projections we assume that dividends are maintained at a steady payout of 35%. We do not factor in any major acquisitions. Therefore, we expect CCI to build up its financial headroom under the current rating over the rating horizon. Management's target is to maintain net debt-EBITDA below 2.0x, which we believe is achievable. DERIVATION SUMMARY Coca-Cola Icecek is the fifth-largest bottler in the Coca Cola system. Compared to the main peers Femsa (A-) and Amatil (BBB+), CCI has smaller size and lower EBITDA margin and operates in markets that require more capex and are vulnerable to volatile demand. On the other side, with funds from operations (FFO) adjusted net leverage at 2.3x and FFO fixed charge cover of 6.1x at 2016, CCI is well positioned in its rating of 'BBB' (which includes a one-notch uplift based on Fitch's parent-subsidiary linkage) and in comparison to other Coca-Cola bottlers. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - USD/TRY exchange rate at 3.7 at end December 2017, and 3.9 from 2018 onwards; - Turkish volumes to grow in the low single digits, with the average selling price (ASP) rising at an average of 6% for 2017 and 2018; - international volumes to grow in the low single digits, combined with an increase in the ASP (including foreign-currency depreciation) of 1.5%-2.0% per annum for 2017-2020; - consolidated EBITDA margin at around 14.8% for the period 2017-2020 (2016:15.5%); - positive free cash flow (FCF after dividends) after capex at 8.5% of net sales (50% maintenance) but dividends capped at 35% of distributable net income; - minimal M&A spending. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - As the highest-rated corporate in Turkey, an upgrade of the IDRs is unlikely due to CCI's limited scale, diversification and forex exposure. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action For the LC IDR: - a material permanent deterioration in FCF generation or a large acquisition leading to FFO adjusted net leverage above 2.5x for an extended period, along with FFO fixed charge coverage below 6x; - diminishing of CCI's strategic or operational ties with TCCC, or geopolitical developments affecting TCCC's international operations; or - adverse impact of a sharp devaluation of the Turkish lira on the company's credit metrics, not accompanied by adequate cash preservation measures such as dividend and capex reduction. For the FC IDR: - a downward revision of the Country Ceiling for Turkey, which would lead to a downgrade of the sovereign's and CCI's FC IDRs. LIQUIDITY Solid Liquidity: Liquidity was supported by unrestricted cash (as defined by Fitch) of TRY1,286 million at end-2016, approximately USD1.3 billion in undrawn uncommitted (as is typical in Turkey) bank lines, as well as a strong relationship with both local and international banks. Liquidity is supported by our expectation of positive FCF (forecast above TRY300 million per annum post dividends). The planned issue will add additional comfort to CCI's liquidity profile by shifting major debt maturities. Contact: Principal Analyst Marialuisa Macchia Associate Director +39 02 879087 213 Supervisory Analyst Giulio Lombardi Senior Director +39 02 879087 214 Fitch Italia S.p.a. Via Privata Maria Teresa, 8 20123 Milan Committee Chairperson Pablo Mazzini Senior Director +44 203 530 1021 Date of Relevant Rating Committee: 5 July 2017. Summary of Financial Statement Adjustments - Fitch has adjusted the debt by adding 5x annual operating lease expense related to an estimate of long-term assets of TRY27 million in 2016. Fitch has deducted TRY194 million from cash and cash equivalents for operational working-capital purposes. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 10 March 2017 to 7 August 2017 (pub. 10 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Rating Non-Financial Corporates Above the Country Ceiling Rating Criteria (pub. 15 Feb 2017) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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