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01 Apr 2016
New York, April 01, 2016 -- Moody's Investors Service (Moody's) affirmed today Coca-Cola
FEMSA, S.AB. de C.V.'s (KOF) A2
senior unsecured ratings. The outlook remains negative.
The rating action follows Moody's rating action on March 31,
2016 that changed Mexico's ratings outlook to negative from stable.
The negative outlook on KOF's ratings reflects the change in Mexico's
issuer and government bond ratings outlook to negative from stable.
KOF is rated above Mexico's sovereign rating, a situation that only
occurs under exceptional circumstances when an issuer's fundamentals are
stronger than those of the sovereign. In the case of KOF this is
evidenced by its strong credit metrics, ample liquidity, limited
reliance on the local banking system for funding and cash generation outside
Mexico. These factors mitigate KOF's links with the Mexican economy.
Nonetheless, with 44% of the revenues and 51% of EBITDA
dependent on Mexico, KOF's ratings could be affected by a sharp
deterioration of domestic fundamentals.
KOF's ratings are supported by the company's position as the largest franchise
Coca-Cola bottler globally, with leading market shares and
significant distribution infrastructure to supply both the traditional
and modern channels in its territories across Latin America and the Philippines.
It also reflects its strong profitability, and sustained strong
free cash flow generation combined with healthy credit metrics over the
last several years. KOF 's market position has strengthened upon
mergers in Mexico and acquisitions in Brazil and in the Philippines,
however these activities have also caused leverage to rise above historical
levels. It is Moody's expectation that leverage will decrease
over time. The ratings also reflect KOF's strategic importance
to the overall Coke system, which, under Moody's Global Soft
Beverage Industry Rating Methodology, provides one notch of ratings
uplift to the company's standalone credit profile.
Key credit challenges include the company's exposure to volatile economies
such as Venezuela, intense competition across franchise territories,
a contraction of Brazilian economy, significant depreciation across
Latin American currencies and event risk arising from M&A activity.
KOF's earnings generation benefits from solid market leadership throughout
its franchise territories and the strong acceptance of Coca-Cola
brands in these markets. Mexico, KOF's largest market,
is one of the most important in the Coke system. According to The
Coca-Cola Company, the countries outside the US with the
largest unit case volumes include Mexico, China, Brazil and
Japan, which together accounted for 31% of worldwide unit
case volume in 2015. According to Euromonitor International,
The Coca-Cola Company (Aa3 stable) has maintained a market share
of around 68% in the last six years positioning it as the market
leader in Mexico. PepsiCo has a #2 market position with a 16%
KOF's deleveraging process following the debt-funded acquisition
of a Brazilian bottler in September 2013 has been challenged by weaker
consumption trends in Mexico in 2014 and the FX volatility in the region
in 2015. KOF closed 2015 with Moody's adjusted debt/EBITDA
of 2.0 times. We expect that, absent any major debt
funded transactions, KOF will reduce leverage below 1.5 times
by year-end 2018. If further acquisition opportunities arise
during this time frame, the company will not have sufficient cushion
within the current rating level to fund them with debt. Supporting
the company's expansion plan is its track record of reducing leverage
following major acquisitions.
KOF has strong liquidity evidenced by its sizeable cash balance at MXN
16 Billion (USD 926 million) as of December 31, 2015, which
is sufficient to cover 4.6 times short term debt. Historically,
KOF has generated positive free cash flow (defined as cash from operations
after dividends and capital expenditures) although free cash flow to debt
has declined from historical levels. In 2015 KOF free cash flow
was MXN2.1 billion (USD135 million).
Supporting KOF's liquidity is the company's historic strong cash generation
and conservative financial policies. Similar to other Latin American
companies, KOF does not maintain a committed revolving credit facility
for backup purposes but instead uses uncommitted bank lines and cash reserves
to cover unforeseen liquidity needs.
KOF's ratings outlook could be stabilized if Mexico's outlook is
Given that the outlook for Mexico's sovereign rating is negative,
an upgrade of KOF's ratings is unlikely. If Mexico's
sovereign rating were to be upgraded in the future, KOF's
ratings could be upgraded if the company continues to show strong cash
flow generation such that FCF/Debt is over 18%, credit metrics
improve (debt/EBITDA below 1 time and EBIT/Interest expense above 11 times),
and revenues are sustained over USD12 billion.
The ratings could be downgraded if Mexico's rating is downgraded
or if the company fails to reduce leverage as projected or if its credit
metrics deteriorate materially whether due to operating difficulties or
further debt financed acquisitions. Failure to reduce leverage
below 2.0 times over the next 18 months could lead to a downgrade.
Coca-Cola FEMSA, S.A.B. de C.V.
is the largest franchise Coca-Cola bottler in the world.
It produces, sells, markets and distributes Coca-Cola
trademark beverages, including sparkling beverages (colas and flavored
sparkling drinks), water, and still beverages (juice drinks,
coffee, teas, milk, value-added dairy and isotonic
products). The company is geographically diversified, but
its largest and most profitable market is Mexico. It also operates
in Brazil, its second-largest market, as well as Argentina,
Colombia, Venezuela and various Central American countries and the
Philippines. Headquartered in Mexico City, Mexico,
KOF reported revenues of MXN152.4 billion (about USD9.6
billion) in 2015.
The principal methodology used in these ratings was Global Soft Beverage
Industry published in May 2013. Please see the Ratings Methodologies
page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
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whose ratings may change as a result of this rating action, the
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's affirms Coca-Cola Femsa's A2 ratings; negative outlook
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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