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Global Credit Research - 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
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
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
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.
Asst Vice President - Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's de Mexico S.A. de C.V
Moody's assigns a Aaa.mx rating to Coca-Cola FEMSA's proposed Certificados Bursátiles
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
No Related Data.
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