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Global Credit Research - 20 Jul 2010
Approximately MXN1.5 billion in rated debt instruments affected
Mexico City, July 20, 2010 -- Moody's de México (Moody's) today downgraded the Mexican
national scale rating of Fomento Económico Mexicano, S.A.B.
de C.V.'s (FEMSA) MXN1.5 billion certificados
bursátiles (local notes) due 2011 to Aa2.mx from Aa1.mx.
This rating action concludes the rating review initiated on January 11,
2010. The rating outlook is stable.
The downgrade primarily reflects FEMSA's reduced cash flow generating
capacity and business diversification following the sale of its FEMSA
Cerveza beer unit to Heineken in exchange for a 20% minority economic
interest in the latter. As a result, credit support for debt
at FEMSA's holding company has weakened and will now mainly come
from FEMSA Comercio, a wholly owned subsidiary which operates Oxxo
(Mexico's largest convenience store chain), as the company
no longer counts on cash flows of a major wholly owned beer operation.
To some extent the rating also benefits from FEMSA's controlling
53.7% interest in Coca-Cola FEMSA (KOF, A3/positive)
and the expected dividend stream and value of its new Heineken asset.
Moody's notes that it analyzes FEMSA's credit quality after deconsolidating
Coca-Cola FEMSA's results (i.e. on a "FEMSA
ex-KOF" basis), while also considering KOF's dividend.
This approach reflects the limitations of FEMSA's control over publicly
traded KOF given the latter's independent treasury function and
The Coca-Cola Company's (KO) ability to veto certain key
business decisions and block dividends exceeding 20% of KOF's
prior year's net income (KO owns 31.6% of KOF's
The divestiture of the beer unit reduced FEMSA ex-KOF's operational
scale by cutting its revenues roughly in half, eliminated around
two thirds of the company's consolidated EBITDA, and left
it less diversified as it now has one instead of two business lines (besides
the Coke bottling operation). Femsa ex-KOF will also generate
less cash flow because of Oxxo's lower profitability as a retailer
(compared to the very solid double-digit beer margins) and its
aggressive investments in store network growth.
Despite the loss of beer cash flow, on a gross debt-basis,
Moody's currently expects leverage at FEMSA ex-KOF to remain
reasonable (albeit likely somewhat higher), as Heineken has assumed
USD2.1 billion in debt at FEMSA Cerveza, which used to account
for the bulk of FEMSA ex-KOF's debt. Estimates indicate
that FEMSA ex-KOF's lease adjusted Debt/EBITDA pro forma
without beer (and excluding any benefits from dividends) could be around
3.0 times, which compares to an actual 2.2 times in
2009 when still including beer.
Irrespective of gross leverage, however, Moody's notes
that FEMSA has solid financial flexibility following the Heineken deal,
with a net cash position at FEMSA ex-KOF and negligible net debt
when considering FEMSA on a consolidated basis (i.e. including
KOF). Moody's estimates, that the company currently
maintains around MXN13.0 billion in cash at its holding company,
vs. MXN7.5 billion in debt (there is no meaningful external
debt at FEMSA Comercio or any other subsidiary except for KOF).
Nonetheless, FEMSA has also indicated that it considers its current
capital structure as under-levered and that it intends to invest
excess liquidity in its two businesses or, absent major opportunities,
increase shareholders returns. Gross leverage may thus be more
indicative of future credit metrics. FEMSA has not given specific
guidance as to the timing or form of potential investments. Larger
transactions that require incremental external funding may thus be a possibility,
creating some degree of event risk.
FEMSA's ratings consider the new and likely recurring source of
cash dividends the company will receive from its 20% interest in
Heineken, along with the added financial flexibility implied by
the value of that stake (USD5.1 billion as July 20, 2010).
In Moody's view, however, these benefits do not fully
compensate for the lost diversification and cash flow of the beer unit.
Based on KOF's and Heineken's most recent dividend declarations,
Moody's believes that going forward FEMSA could receive around USD200
million in annual dividends from these two entities. This compares
to an annual reported EBITDA for FEMSA ex-KOF of currently around
MXN6 billion (USD465 million). In line with conditions customary
for this type of transaction, the Heineken shares have a lock-in
period of three years after which FEMSA can sell 1% per calendar
quarter (i.e. it could sell off its entire stake over five
years starting in 2013). It may, however, pledge the
shares as collateral in order to facilitate external funding.
The stable rating outlook reflects Moody's expectation of continued
organic growth and margin expansion in the convenience store business,
a steady healthy financial profile of the Coke bottling operation,
and recurring dividend streams from both KOF and Heineken which should
complement cash generation at Oxxo. The stable outlook leaves some
room for investments or shareholder returns as FEMSA reduces excess balance
sheet liquidity and returns to a moderately levered capital structure.
Ratings could come under pressure if Oxxo's cash flow deteriorates
materially or if the anticipated investments and/or shareholder returns
turn out larger than expected and require material external financing
such that FEMSA ex-KOF's credit metrics weaken materially
(e.g. with adjusted Debt/EBITDA rising exceeding 3.0
times for a prolonged period). The ratings could also be lowered
if dividend inflows lag Moody's expectations or if FEMSA or FEMSA
Comercio add material debt that is senior to the holding company notes,
increasing the risk of structural subordination.
Positive ratings pressure is unlikely in the near term but could develop
longer term if FEMSA Comercio continues to grow the scale of its c-store
business, turns free cash flow positive, and improves lease-adjusted
credit metrics on a sustainable basis (e.g. with adjusted
Debt/EBITDA at FEMSA ex-KOF of below 2.0 times).
Any positive rating movement would also require clarity about FEMSA's
plans to re-invest or pay out its current excess liquidity or to
incur incremental debt to fund major investments.
The last rating action on FEMSA was January 11, 2010, when
Moody's placed FEMSA's national scale rating to Aa1.mx on
review for possible downgrade.
The principal methodology used in rating FEMSA was Moody's Global Retail
Rating Methodology, document #100824, published in November
2006 and available on 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.
Headquartered in Monterrey, Mexico, Fomento Económico
Mexicano, S.A.B. de C.V. (FEMSA),
is one of the region's leading consumer-oriented companies.
FEMSA, through its wholly owned subsidiary FEMSA Comercio,
operates Mexico's largest convenience store chain, Oxxo.
The company also holds a controlling interest in Coca-Cola FEMSA,
Latin America's largest Coke bottler, and became a minority shareholder
of Heineken after the recent sale of its FEMSA Cerveza beer business.
For the 12 months ended March 31, 2010, FEMSA Comercio reported
revenues of MXN53.5 billion (about USD3.95 billion).
Sebastian Hofmeister, CFA
Vice President - Senior 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 downgrades FEMSA's national scale rating to Aa2.mx; outlook stable
No Related Data.
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