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Rating Action:

Moody's affirms Coca-Cola Femsa's A2 ratings; negative outlook

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.

RATING RATIONALE

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% share.

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 stabilized.

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.

REGULATORY DISCLOSURES

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 support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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 the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alonso Sanchez
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
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Coca-Cola Femsa's A2 ratings; negative outlook
No Related Data.
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