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Announcement:

Moody's assigns a Aaa.mx rating to Coca-Cola FEMSA's proposed Certificados Bursátiles

 The document has been translated in other languages

01 Apr 2011

Approximately MXN5,000 million of debt affected

Mexico, April 01, 2011 -- Moody's de México, S.A. de C.V. (Moody's) has assigned senior unsecured ratings of Aaa.mx (Mexican National Scale) and A3 (Global Scale, Local Currency) to the proposed Certificados Bursátiles KOF 11 and KOF 11-2 of Coca-Cola FEMSA, S.A.B. de C.V. (KOF) for a combined amount of up to MXN5,000 million. The rating outlook is positive.

The proposed issuance consists of floating rate notes (KOF 11) with a tenor of up to five years and fixed rate notes (KOF 11-2) with a tenor of up to ten years. The combined principal of the two instruments should not exceed MXN5,000 million. Moody's expects the company to use the proceeds from the proposed local notes primarily to refinance MXN3,000 million in existing debt and for general corporate purposes. The transaction will be guaranteed by Propimex, S.A. de C.V., KOF's operating company in Mexico. Propimex represents approximately 100% of revenues and 80% of operating income of KOF's operation in Mexico. According to the company, starting in April 2011, Propimex will guarantee all the existing debt at KOF's holding company level.

KOF's A3/Aaa.mx ratings are supported by the company's position as the largest Coca-Cola bottler in Latin America, with leading market shares and significant distribution infrastructure in its franchise territories, strong profitability, and a track record in recent years of ample free cash flow and healthy credit metrics. The company benefits from significant brand diversity and product innovation because of its access to The Coca-Cola Company's broad product portfolio. KOF's ratings also reflect its strategic importance to the overall Coke system, which under Moody's Global Soft Beverage Industry rating methodology provides a notch of ratings uplift to the company's standalone credit profile.

Key credit challenges include the potential volatility and country risks inherent in some of KOF's South and Central American markets such as Venezuela and Argentina, intense competition across franchise territories, and certain currency and commodity exposure in its cost structure. The ratings also reflect some degree of event risk as the company will likely continue to pursue opportunities to consolidate its market presence in the region, possibly via debt-financed acquisitions.

The positive outlook reflects our expectation that KOF will be able to keep the current trend in earnings and generate ample free cash flow in 2011 allowing it to at least maintain current credit metrics. The outlook also reflects the expectation that acquisitions and/or returns to shareholders will not materially affect credit metrics over the medium term and that recent consolidation in the Mexican Coca-Cola system will not have a material impact on KOF's relative strength within the overall system.

KOF's exposure to a number of countries with high implied sovereign risk is a rating challenge. During 2010, single-B rated Venezuela and Argentina together accounted for 16% of KOF's sales volume. This exposure, while moderate, creates some downside risks to earnings in a less benign scenario, especially if such a scenario would follow major acquisitions that increase leverage. The recent unification of the two fixed foreign exchange rates in Venezuela will affect KOF's margins by making U.S. dollar denominated raw materials more expensive.

In Argentina, there are currently no restrictions on purchasing dollars to fund dividend payments or to cover dollar-denominated operating costs, although the country's low sovereign rating implies some risk that this could change in the future (controls and transfer restrictions were in place as recently as six years ago). We also currently do not see expropriation or nationalization as a significant risk in either country as the company does not operate in sectors considered strategic to national security.

The beverages sector has been going through an ongoing consolidation, generally throughout the globe but particularly in Latin America, where despite the active consolidation process of the past years still offers further opportunities for large companies looking to expand. The most recent material consolidation was announced in January 2011 by Mexico's second and third largest bottlers behind KOF, Embotelladora Arca and Grupo Continental, which is expected to be finalized in the second quarter of 2011. Despite the importance that this newly consolidated entity will have for the Coca-Cola system due to its high profitability as compared with global peers, we consider that it will not materially change the dynamics for KOF as their territories do not overlap.

KOF profitability continues to be strong and has improved over the last years; however current margins are still somewhat below pre-crisis levels. The company's geographic and product diversification allowed KOF to offset the negative impact of bad weather conditions in Mexico and Central America as well as higher prices in some raw materials. The company's margins continue to compare favorably with those of global bottler peers.

Revenues of MXN103,456 million in 2010 represented a modest 0.7% increase compared to the previous year. This is the result of revenue growth in Mexico and the Mercosur division that was counterbalanced by the currency devaluation in Venezuela. Operating margins increased from 15.4% in 2009 to 16.5% in 2010 driven by strong operating income growth in the Latincentro division which more than offset the negative impact of bad weather conditions and higher sweetener costs across the region. EBITDA increased by 6.5% from MXN19,746 million in 2009 to MXN21,022 million in 2010. Similarly, EBITDA margin increased by 110 b.p. to 20.3% in 2010.

As of December 31, 2010 KOF reported gross and net total debt of MXN17,351 million and MXN4,932 million, respectively, which include U.S. Dollar-denominated net debt of approximately USD78 million. While the company does not generate material dollar revenues its internal financial policies require that dollar-denominated net debt does not exceed USD300 million. During 2010, the company maintained low leverage with Debt/EBITDA of 0.8x and strong interest coverage with EBIT/Interest of 9.8x. During 2010 FCF/Debt was 13.9% and RCF/Net Debt was 258%.

Headquartered in Mexico City, Mexico, Coca-Cola FEMSA is the largest Coca-Cola bottler globally in terms of sales volume. The company's largest and most profitable market is Mexico, which accounts for about 37% of revenues and 40% of EBITDA. It also operates in Brazil, its second-largest market, and Argentina (combined under the Mercosur division) as well as Venezuela, Colombia and various Central American countries (the Latincentro division).

The last rating action on Coca-Cola FEMSA was on January 21, 2010, when Moody's changed the company's rating outlook to positive from stable.

The principal methodology used in rating Coca-Cola FEMSA is the Global Soft Beverage Industry Rating Methodology (December 2009), which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Mexico
Alonso Sanchez
Asst Vice President - Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns a Aaa.mx rating to Coca-Cola FEMSA's proposed Certificados Bursátiles
No Related Data.
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