Fitch assigns A ratings for Coca-Cola FEMSA for following: long-term foreign currency IDR, long-term local currency IDR, US$300 in senior notes due 2023, US$700M in senior notes due 2043
December 22, 2013
– Fitch Ratings has affirmed the ratings of FEMSA, S.A.B. de C.V. (FEMSA) as follow:
--Long Term Foreign Currency Issuer Default Rating at 'A';
--Long Term Local Currency IDR at 'A';
--Senior notes for USD300 million due 2023 at 'A';
--Senior notes for USD700 million due 2043 at 'A';
--National Scale Long Term Rating at 'AAA(mex)';
--National Scale Short Term Rating at 'F1+(mex)';
--Local Certificados Bursatiles Issuances FEMSA 07U due in 2017 at 'AAA(mex)'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
FEMSA's ratings reflect a solid business portfolio of leading companies in the beverage and retail industries, strong financial profile at the FEMSA holding level characterized by low debt levels and ample liquidity, the free cash flow (FCF) generation capacity of its subsidiary FEMSA Comercio, as well as the reliable flow of dividends FEMSA receives from the diversified operations of its subsidiary Coca-Cola FEMSA, S.A.B. de C.V. (KOF, rated 'A', Outlook Stable) and its 20% equity interest in Heineken a global brewery company. The ratings are constrained by the volatility in the level of economic activity and the effect new taxes on beverages with sugar content and high calorie products could have on FEMSA Comercio results.
Solid Business Portfolio
The ratings reflect the solid business positions of FEMSA's beverage and retail business. In the beverage sector, KOF is the largest franchised independent bottler of Coca-Cola products in the world in terms of sales volume, where FEMSA has a 47.9% economic ownership and 63% voting rights and also owns a 20% equity interest in Heineken. KOF's 'A' ratings reflect the company's substantial FCF generation across the cycle, solid financial position, ample financial flexibility and strong business profile. The ratings also incorporate the company's strategic relationship with The Coca-Cola Company (KO; rated 'A+', Outlook Stable) and the explicit and implicit financial support KOF has received from KO. In the retail sector, FEMSA's wholly owned subsidiary FEMSA Comercio, is the largest chain of convenience stores in Mexico, under the brand name Oxxo.
FEMSA's ratings take into account the geographical diversification that KOF and Heineken brings. In addition, it benefits from business diversification within the beverage industry as well as the currency diversification these companies give. KOF has operations across Latin America and investments in the Philippines, while Heineken has operations in over 70 countries across the globe. FEMSA's holding company benefits from steady dividend payments from both KOF and Heineken.
Strong Retail Performance
The retail division has a solid track record of organic growth with internally generated cash flow and is growing at a faster pace than the industry in Mexico based on same store sales (SSS). Solid cash generation contributes to growth without incurring debt and still leaves room to support the holding company. FEMSA Comercio maintains the leading position in Mexico in the convenience store segment with a total of 11,210 stores as of Sept. 30, 2013, and continues opening on average more than 1,000 stores per year in the past three years. FEMSA Comercio's revenues for the last 12 months as of Sept. 30, 2013, were MXN94.5 billion, which represented a 13% increase compared to the previous year, while the SSS indicator grew close to 2%. In terms of profitability, Fitch's estimated EBITDA margin of FEMSA Comercio was relatively stable at 10%.
Strong Financial Profile
Fitch's expectation incorporates that FEMSA's credit metrics, excluding KOF, will continue strong. For the last 12 months as of Sept. 30, 2013, excluding the operations of KOF and the dividends received from KOF and Heineken, FEMSA's estimated ratio of total adjusted debt by rents to EBITDAR was 3.0x, while the total adjusted net debt to EBITDAR was 1.0x. These ratios would have been 2.2x and 0.8x adding in the dividends of KOF and Heineken to EBITDAR. During Dec. 2013, FEMSA advanced the 2014 dividend payment of approximately MXN6.7 billion before the tax laws for individuals in Mexico change in 2014. This will result in a temporary decline in cash balances that Fitch anticipates to be fully replenished during 2014.
At the holding company, FEMSA has a manageable debt profile and good access to capital markets. Fitch expects FEMSA to maintain a strong financial profile in the long term with high cash balances and low debt levels. On an unconsolidated basis as of Sept. 30, 2013, FEMSA's cash and marketable securities balances were MXN26.6 billion with total debt of MXN19.8 billion. The company's debt maturity profile after paying MXN3.5 billion of Certificados Bursatiles in November 2013 is composed of a local issuance of MXN3.6 billion due in 2017, USD300 million due 2023, USD700 million due in 2043, and around USD44 million of debt maturing between 2014 and 2018 related to its other businesses, FEMSA Logistica and Imbera. In addition, the company has USD120 million in committed credit facilities and FEMSA's 20% stake in Heineken has a market value of approximately EUR5.2 billion.
Investments or acquisitions are factored into the ratings. Fitch expects that FEMSA will continue evaluating investments or acquisitions in order to strengthen its business portfolio without significantly changing its capital structure in the long term. During 2013, FEMSA Comercio continued with its strategy to increase its presence in the small-box format store segment and acquired the operations of Farmacias YZA, and Farmacias FM Moderna, as well as announcing an agreement to acquire an investment stake of 80% in Dona Tota, which is a recognized brand of quick service restaurants. These transactions are expected to provide a new avenue of growth in the long term, in particular Dona Tota, to bring relevant skills in the area of prepared food operation in FEMSA Comercio.
Negative ratings actions could result from a significant change in the capital structure of the company in the long term as a result of an aggressive acquisition strategy or a sustained deterioration of the profitability and cash flow generation from its business portfolio. In addition, any negative action on KOF's ratings is likely to pressure FEMSA's ratings. Positive ratings actions are not foreseen in the medium term.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'National Scale Rating Criteria' (Oct. 30, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).
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