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Rating Action:

Moody's changes outlook for Bimbo's Baa2 ratings to positive; upgrades national scale rating

 The document has been translated in other languages

08 Jun 2010

Approximately MXN10 billion in debt securities affected

Mexico City, June 08, 2010 -- Moody's Investors Service changed the rating outlook for Grupo Bimbo, S.A.B. de C.V.'s (Bimbo) Baa2 global scale senior unsecured debt and issuer ratings to positive from stable. At the same time, Moody's upgraded Bimbo's Mexican national scale rating (NSR) to Aa1.mx from Aa2.mx and affirmed Bimbo's existing senior unsecured Baa2 global scale ratings. The outlook for the national scale rating is stable.

"The outlook change and NSR upgrade primarily reflect Bimbo's ongoing progress in de-leveraging its balance sheet following last year's acquisition of Weston Foods, Inc. (WFI's) fresh bakery business despite challenging market conditions in its key Mexican and U.S. baked goods markets," said Sebastian Hofmeister, a senior analyst at Moody's in Mexico City.

These rating actions also reflect the expectation that efficiency measures, synergies from the WFI deal and moderate capex levels should continue to support near term earnings and free cash flow trends, helping the company to further reduce debt for several more quarters before reaching its target capital structure, Hofmeister said.

The improvement of credit metrics was largely driven by debt reduction from free cash flow and the added earnings from WFI (now called BBU East). Credit metrics are now relatively well aligned with the Baa2 rating category. For the 12 months ended March 31, 2010, lease and pension adjusted Debt/EBITDA, EBIT/Interest and Retained Cash Flow/Net Debt were 2.5 times, 4.0 times and 25%, respectively, well ahead of the 3.5 times, 3.7 times and 17% Moody's had estimated on a pro forma basis at the time of the acquisition.

Moody's expects metrics to improve somewhat further over the coming quarters but to potentially level out on a gross debt basis in line with Bimbo's stated target for reported Debt/EBITDA of around 2.0 times, which would translate into 2.3 times when adjusted for certain lease and labor obligations. Metrics may continue to improve further on a net debt basis if cash reserves accumulate with positive free cash flow, although this will ultimately depend on the company's acquisition and investment plans and its returns to shareholders.

While Bimbo's organic revenue growth in local currencies has recently remained anemic because of weak economic conditions in its key markets and pronounced promotional activity in the U.S., the company's top line grew materially over the past 12 months because of the addition of BBU East. For the LTM 1Q10 period, Bimbo reported net revenues of MXN116 billion (USD8.9 billion), up 27% year-over-year. Margins also improved, with the reported LTM EBITDA margin of 14.1% reflecting a 210bp increase vs. the comparable period, largely driven by BBU East's higher margins and cost efficiencies, which could more than offset the negative effects of soft volumes and pricing.

Moody's expects Bimbo to exhibit resilient margins and cash generation given the defensive nature of the branded packaged food sector. In addition, earnings in the U.S. should continue to benefit from modest synergies from the WFI integration over the next few years, driven by increased sales and administrative efficiencies as well as benefits from distribution network optimization and better purchasing terms. Bimbo estimates around USD100 million in annual EBITDA benefit by 2014.

On an LTM basis, free cash flow was around MXN6.8 billion (USD517 million), driven by earnings growth and low capex (MXN3.0 billion or USD231 million), as well as inflows from working capital. Moody's expects Bimbo to remain free cash flow positive in 2010 despite a likely return to higher capital spending (in its 4Q09 earnings call Bimbo indicated it will spend around USD330 million this year, which would be slightly above depreciation and amortization).

Bimbo's liquidity is currently solid, reflecting the continued debt reduction over the past year which helped lower debt maturities for the remainder of 2010 to a modest MXN2.8 billion (USD221 million). In addition, debt maturities in 2011 are minimal (MXN714 million or USD58 million). Bimbo should be able to easily cover these commitments with existing cash reserves and free cash flow (as of March 31, 2010, cash was at MXN4.9 billion).

Liquidity is somewhat tempered by more sizeable debt maturities in subsequent years, including MXN13.5 billion (USD1.1 billion) in 2012, MXN5.4 billion (USD437 million) in 2013 and MXN7.7 billion (USD624 million) in 2014. However, Moody's expects Bimbo to refinance these on a timely basis in the debt capital markets or through bank financing and, to a lesser extent, with free cash flow. Bimbo also maintains a USD750 million committed revolving credit facility with a bank syndicate which is currently undrawn and provides alternate liquidity.

Besides the aforementioned factors, Bimbo's Baa2 and Aa1.mx ratings are underpinned by the free cash flow generation of its high margin baked-goods franchise in Mexico, its improved U.S. business position and geographic diversification, and prudent financial policies. These credit positives are partly offset by the competitive nature of the markets the company operates in (in particular in the U.S.), the volatility of results in its South and Central American markets and the traditionally modest (although recently improved) profitability in its western U.S. markets.

Global scale ratings could be upgraded when Moody's expects credit metrics to improve such that adjusted Debt/EBITDA falls close to or below 2.0 times and Retained Cash Flow/Net Debt will solidly exceed 30% on a sustainable basis. An upgrade would also require several further quarters of favorable performance in the U.S., limited risk that debt financed acquisitions materially affect performance or credit metrics (in particular related to the ongoing consolidation in the U.S. baked-goods industry), and a cleaner medium term debt maturity profile.

The outlook for the global scale rating could be stabilized if credit metrics weaken substantially, for example because of higher than expected investment spending, debt-financed acquisitions that are not sufficiently free cash flow accretive or unexpected aggressive payouts to shareholders, with Debt/EBITDA rising towards 3.0 times for a prolonged period without a clear path to subsequent de-leveraging.

The last rating action on Bimbo was on December 10, 2009, when Moody's changed Bimbo's outlook to stable from negative and affirmed Bimbo's senior unsecured ratings at Baa2 and Aa2.mx.

The principal methodology used in rating Bimbo is Moody's Global Consumer Packaged Goods Rating Methodology, 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.

Based in Mexico City, Mexico, Grupo Bimbo, S.A.B. de C.V is the largest producer of packaged bread and sweet baked goods in Mexico and the U.S. and one of leading players in Mexico's salty snack and confectionary categories. For the 12 months ended March 30, 2010, the company reported MXN116 billion (USD8.9 billion) in revenues, which included a full year of Weston Foods, Inc.'s fresh bakery business acquired in January 2009.

Mexico City
Sebastian Hofmeister, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
Telephone:+52-55-1253-5700

New York
Mark Gray
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes outlook for Bimbo's Baa2 ratings to positive; upgrades national scale rating
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