July 6, 2017 / 3:57 PM / 6 months ago

Fitch Upgrades Coca-Cola Icecek's Long-Term Foreign-Currency IDR to 'BBB'; Outlook Stable

(The following statement was released by the rating agency) LONDON/MILAN, July 06 (Fitch) Fitch Ratings has upgraded Coca-Cola Icecek A.S's (CCI) Long-Term Foreign-Currency (FC) Issuer Default Rating (IDR) and senior unsecured rating to 'BBB' from 'BBB-'. The Long-Term Local-Currency (LC) IDR is affirmed at 'BBB'. The Outlooks on the FC and LC IDRs are Stable. The upgrade of the FC IDR and senior unsecured rating to 'BBB' reflects the strong implied and proven support of The Coca-Cola Company (TCCC) ('A+'/Negative). CCI enjoys a strong operational and strategic relationship with TCCC, which owns 20.1% of CCI and exercises a large degree of influence over major decisions. 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. Consequently, Fitch assesses transfer and convertibility risk as low in line with Fitch's ratings criteria, "Rating Non-Financial Corporates above the Country Ceiling", dated February 2017. The 'BBB' IDRs reflect CCI's solid industry operating profile, the quality of its brand portfolio, growth capability in Turkey and the Middle East, and its consistent history of pricing power and profit margin stability through various economic cycles. We expect CCI to maintain a conservative balance sheet with FFO adjusted leverage trending to 3.0x to mitigate the inherent profit/debt mismatch by currency, and its exposure to geopolitical events. KEY RATING DRIVERS Resilient Business Model: Fitch Ratings 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. 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 due to the strong implied support from TCCC considering its past record of support for CCI and its other bottlers, especially in less developed economies. Consumer Health Trend: Health and wellness trends have resulted in a structural shift away from 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: Factors that constrain the rating are the events and instability that can hinder what would otherwise be strong top-line growth in its key markets. However, 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 growth) 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 CCI is the fifth-largest bottler in the Coca-Cola system and the highest-rated corporate in Turkey, benefiting from support from TCCC, a conservatively managed balance sheet and a record of consistent profit growth and of resilience against past and present macroeconomic challenges. CCI has strong credit ratios for the ratings and relative to other Coca-Cola bottlers, with funds from operations (FFO) adjusted net leverage at 2.3x and FFO fixed charge cover of 6.1x at 2016. 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 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 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 - 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 Strong Liquidity: Liquidity was supported by unrestricted cash (as defined by Fitch) of TRY1,286 million at end-2016, approximately USD 1.3 billion in undrawn uncommitted (as typical in Turkey) bank lines, as well as 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). CCI's next major debt maturity is in 2018 when TRY1,887 million becomes due. Contact: Principal Analyst Marialuisa Macchia Associate Director +39 02 879087 213 Supervisory Analyst Paula Murphy Director +44 203 530 1717 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 203 530 1021 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: Adrian Simpson, London, Tel: 203 530, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com. 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