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Fitch Upgrades Arcor's Senior Notes to 'BB-/RR3'
March 17, 2017 / 6:29 PM / 8 months ago

Fitch Upgrades Arcor's Senior Notes to 'BB-/RR3'

(The following statement was released by the rating agency) NEW YORK, March 17 (Fitch) Fitch Ratings has upgraded the Long-Term Local Currency Issuer Default Ratings (LC IDR) of Arcor S.A.I.C (Arcor) to 'BB' from 'B+', as well as the senior unsecured notes to 'BB-/RR3' from 'B+/RR4'. In conjunction with these rating actions, Fitch affirms Arcor's Foreign Currency (IDRs) at 'B+', which is one notch higher than the 'B' Country Ceiling of Argentina. The Rating Outlook on the corporate ratings is Stable. The upgrade of the LC IDR is due to Arcor's resilient operating performance during the past five years, despite high inflation and challenging economic conditions. It also reflects the company's consistent commitment to a conservative capital structure. The upgrade of Arcor's notes to 'BB-'/'RR3' reflects above-average recovery expectations for these obligations, as it is Fitch's belief that a default on debt denominated in a foreign currency by Arcor would be driven by exchange controls rather than a deterioration of its solid financial profile or strong business position. KEY RATING DRIVERS Strong Business Position: Arcor's 'BB' LC IDR reflects its strong business position as a leading Latin American producer of confectionary and cookie products. The company's vertical integration ensures the quality of supplies as well as the availability of main inputs. Arcor's brand names and distribution platform have supported leading market shares in chocolates, candies and cookies in its main market of Argentina. Arcor's brands reach consumers in 120 countries. Argentina (including exports to third parties) contributed 71% and 96% to Arcor's revenues and EBITDA generation as of FYE16, respectively, followed by the Andean region (10% and 5%) and Brazil (10% and -7%). Expansion: Fitch expects Arcor to continue to solidify its market leadership position in Latin America. The company has been growing organically through strategic partnerships and acquisitions in an effort to enhance its geographic and product diversification. Key product categories categories include confectionery, cookies, packaged food products and agro-industries. Over the last two years, the group has also increased its participation in Mastellone Hermanos S.A. (Mastellone), a leading dairy producer in Argentina. The company now has 34% of Mastellone shares after a capital injection of USD35 million by Arcor & Bagley Argentina (its JV with Danone) in January 2017. Arcor has a call option to buy the outstanding stock of Mastellone from 2020 to 2025. Conservative Financial Profile: Arcor's financial profile is among the strongest in the Fitch-rated Argentine portfolio and other food, beverage and tobacco (FB&T) companies in the regional portfolio. The company's strong capital structure, as well as it solid business, are key credit factors that support its 'BB' LC IDR. Arcor's ratio of Gross Debt/ EBITDA was 2.6x as of FYE16. The company reported negative FCF due to increased capex and negative working capital in 2016. EBITDA margin remained resilient at about 10.1% in 2016 (11.5% in 2015) despite a weak consumer environment in Argentina due to high inflation, the recession in Brazil and fluctuation in currencies. Fitch expects a gradual recovery in these two markets in 2017. FC IDR Above Country Ceiling: Fitch's criteria for rating FC IDRs higher than an issuer's applicable Country Ceiling takes into consideration the relationship between 12 months of foreign currency debt service and cash held abroad, cash generated by exports, undrawn committed credit lines and cash flow from foreign operations. If the ratio of these factors covers debt service by more than 1.0x for 12 months, issuers FC IDRs may be notched one level above the applicable Country Ceiling. Fitch has notched up the FC IDR of Arcor to 'B+' from Argentina's 'B' Country Ceiling because of the cash it holds abroad, cash generation from its operations outside of the country, and exports. Combined, these items cover its annual debt service by nearly 1.5x. KEY ASSUMPTIONS --Revenue growth in line with inflation; --EBITDA margin remains between 10%-11%; --Gross leverage below 2.5x by 2018. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to a negative rating action include: Further economic decline leading to a sustained deterioration in credit metrics, and/or a change in management's goal of maintaining a conservative capital structure. Conversely, Fitch may take a positive rating action if a combination of the following takes place: Positive rating action is not likely in the near- to medium-term given the high cash generated from Argentine operations and Argentina's current sovereign ratings. However, higher than expected cash generation from investment-grade countries, such as Chile and Brazil, for example a turnaround of performance in Brazil, would be viewed favorably. LIQUIDITY As of December 2016, Arcor had ARS2.2 billion of cash and cash equivalents (USD140 million) and short-term debt of ARS3.9 billion (USD245 million), which is about 41% of total debt. Most of the short-term debt is bank debt. The company has strong access to bank lines to finance exports. FULL LIST OF RATING ACTIONS Arcor S.A.I.C. --Long-Term Foreign Currency IDR affirmed at 'B+' --Long-term Local Currency IDRs upgraded to 'BB' from 'B+'; --Senior unsecured notes upgraded 'BB-/RR3' from 'B+/RR4'. Contact: Primary Analyst Johnny Da Silva Director +1-212-908-0367 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Jose Vertiz Director +1-212-908-0641 Committee Chairperson Joseph Bormann, CFA Managing Director +1-312-368-3349 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Rating Non-Financial Corporates Above the Country Ceiling Rating Criteria (pub. 15 Feb 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020751 Solicitation Status here 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. 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