CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' foreign currency and local currency Issuer Default Ratings (IDRs) assigned to Corporacion Lindley S.A. (Lindley) as well as the 'BBB-' rating assigned to its senior unsecured notes.
The Rating Outlook has been revised to Negative from Stable.
KEY RATING DRIVERS
The Negative Outlook reflects Fitch's concern over Lindley's ability to deleverage within the next 18 to 24 months. Peru's economic environment has impacted consumer spending for the last year and a half, and sentiment remains negative. Fitch is concerned that there will not be enough volume to support Lindley's deleveraging in the near to medium term. The Trujillo megaplant has been operating for a year; this megaplant replaced two older plants in the north. The Pucusana plant is expected to begin operations in the first half of 2015. Fitch is also concerned that Lindley is dependent on non-strategic assets sales to lower its net leverage levels.
Growth Losing Some Fizz
Fitch expects little to no growth in sparkling volumes in the next year; instead growth will be driven by volume increases in water. Recent trends have pointed towards an increased importance of healthier food and beverage choices. Lindley's sales volume was 277.8 million unit cases (UC) during the LTM ended Sept. 30, 2014, a slight increase of 0.6% over 2013; as of September 2014 sales volumes were 203.1 million UC with only water showing growth of 7%.
Economic Conditions Dragging Results
The company's 2013 results were impacted by the slowdown in the Peruvian economy and lower temperatures throughout the country. The weak economic conditions have also sapped the spending power of middle and lower income consumers during this year, leading to little to no growth in Lindley's main product category of carbonated soft drinks. The benefits of Lindley's first mega plant, Trujillo, have been outweighed by Peru's current economic environment. The plant began operations in 2012, replacing two older plants in the north of Peru. Pucusana, the second mega plant is slated to begin operating during the first half of 2015. EBITDA for the LTM ended September 2014 was USD114 million, which is a slight increase from USD110 million reported in 2013 and USD108 million in 2012.
Investment Program Constrains Ratings
Fitch expects negative FCF generation for the next two to three years, resulting in leverage levels that are high for the rating category. At Sept. 30, 2014, debt/EBITDA and net debt/EBITDA ratios were 5.3x and 5.0x, respectively; these metrics are expected to decline in 2015 once the Pucusana plant comes online. Fitch views the investments positively given the expected benefits of increased capacity and lower cost structure. Lindley's heavily debt-funded investments are consolidating and increasing production capacity, and replacing older machinery.
Sole Peruvian Inca/Coca-Cola Bottler
Corporacion Lindley S.A.'s (Lindley) ratings reflect its strong business profile and 70% market share of Peru's carbonated soft-drinks market. Inca Kola is an iconic brand and the leading soft drink of the historically non-Coke Peruvian market; it is 49% of Lindley's carbonated soft drinks sales volume.
Coca-Cola's Implied Support
The company's local currency IDR is one notch above its stand-alone credit profile as a result of the operational and strategic ties between Lindley and The Coca-Cola Company (TCCC, 'A+'/Outlook Stable). TCCC holds 38.5% of Lindley's equity and provides financial oversight by appointing Lindley's CFO. While TCCC does not provide direct financial support to Lindley, there have been times when TCCC has stepped in to help bottlers within the Coke system.
RATING SENSITIVITIES
A Negative Outlook or ratings downgrade could occur if Lindley is not able to close any asset sales in 2015. The ratings could also experience downward pressure if Lindley does not deleverage to targeted net debt/EBITDA level of 3.5x within the next 18-24 months. In addition ratings could be negatively affected if the sovereign environment in Peru deteriorates significantly.
It is not expected a positive rating action due to the high leverage to finance investment program. Deleverage is expected by 2015, once the investment program is complete.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=931416
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