MONTERREY--(BUSINESS WIRE)--Fitch Ratings has affirmed The Central America Bottling Corporation's (CBC) Long- Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB+'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.
CBC's ratings reflect its business position as an anchor bottler of the PepsiCo system with operations in Central America, the Caribbean, Ecuador and Peru. The company has a diversified product portfolio of PepsiCo and proprietary brands across its franchised territories, combined with a broad distribution network. The ratings also benefit from the company's good operating performance, stable leverage metrics and adequate liquidity. CBC's ratings are constrained by the sovereign ratings where it operates, the competitive environment of the beverage industry and the volatility of prices in its main raw materials.
KEY RATING DRIVERS
Leading Position in Core Markets
Fitch believes CBC's brand portfolio, distribution network, and management's abilities to design and execute commercial strategies will support its business position in the future. The company has maintained relatively stable market share positions across it key territories. In Guatemala and Jamaica CBC has the leading brand in the carbonated soft drink category, while in isotonic beverages the company leads the market share in all of the countries where it operates. Its second most important market in terms of revenues is Ecuador where CBC has the leading market position in the water category.
Fitch factors into the ratings, the inorganic growth strategy of CBC in the beverage industry. During the last five years the company has diversified its operations with merger and acquisitions (M&A) in different countries without materially changing its capital structure. In the second quarter of 2016, CBC acquired a 51% equity stake of El Carmen, S.A. in Argentina, a leading company in the juices category under the brand Citric. The transaction was valued at USD20 million, of which USD8.5 million will be paid in the first year and the rest over the next five years. Fitch believes the size of the acquisition is manageable for its credit profile and expects it to add greater geographic and product diversification in the coming years.
Challenged Operating Performance
Fitch expects CBC's revenues to grow in the low single digits in 2016 considering the difficult economic conditions in Ecuador. The implementation of a new tax on sugary beverages in this country combined with a weak consumer environment will partially offset the benefits of consolidating full year operations in Peru and the organic growth from its operations in Central America and the Caribbean. During the first half of 2016, the sales volume and revenue in Ecuador has fallen around 15% and 8% due to higher sales prices. Fitch projects an EBITDA generation similar to 2015 and EBITDA margin of 13%. Higher revenue growth and EBITDA should resume in 2017.
Expected Positive FCF
Fitch expects that CBC's positive free cash flow (FCF) trend during 2015, and for the last 12 months as of June 30, 2016, to continue by the end of this year, supported by relatively stable EBITDA generation, positive net working capital, as well as capex of around USD100 million and dividends of USD37 million. Further positive momentum in the company's FCF generation could also receive support from the full integration of operations in Peru and Argentina and maintenance of stable capex and dividends. Fitch projects FCF of around USD10 million in 2017 - 2018.
CBC's leverage should remain relatively stable with an estimated total debt of around USD500 million over the next two years. This level of debt excludes around USD103 million of loans that are guaranteed with certificates of deposits under a loan structure that the company implemented for its operations in Central America. Fitch anticipates that an improvement in leverage above the agency's projections will be mainly related to higher EBTIDA generation. Fitch projects a total debt to EBITDA and net debt to EBITDA close to 2.5x and 2.0x, respectively for 2016 - 2017. These ratios are in line with the current rating category and could deviate temporarily due to the company's M&A activity.
Exposure to Guatemala's Sovereign Ratings
CBC has exposure to the risks associated with the economic and political environment of the countries where it operates. Guatemala (rated 'BB'/Outlook Stable) is CBC's main market in terms of sales and EBITDA generation. The company's operating performance is likely to depend on the stability and economic development of this country. Additional downgrades in the country's ratings will likely result in negative pressures on the company's ratings.
Fitch's key assumptions within the rating case for CBC include:
--Revenue growth of 3% in 2016 and 4% in 2017;
--EBITDA margins around 13% in 2016 and 2017;
--Positive FCF generation in 2016 - 2017;
--Total debt to EBITDA and net debt to EBITDA at around 2.5x and 2.0x, respectively, by 2016 - 2017.
CBC's ratings could be negatively pressured by the following factors: a downgrade in Guatemala's country ceiling, deterioration of its operating results, negative FCF generation, or significant debt-financed acquisitions that result in a total debt to EBITDA higher than 3x on a sustained basis.
Fitch does not foresee positive ratings actions for CBC in the mid-term; however, the combination of lower leverage ratios, better operating performance, solid FCF generation across the cycle and cash flow generation from investment-grade countries will be considered positive to credit quality.
CBC's liquidity is manageable given its current cash balances of USD83 million and USD84 million of short-term debt as of June 30, 2016. The company also is expected to generate funds from operations (FFO) between USD140 million to USD150 million annually and has non-committed credit lines of around USD89 million. Its next significant debt amortization are in 2018 for USD28 million and in 2019 for USD60 million. Fitch believes CBC has financial flexibility to face its debt amortization in the short and long term.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
The Central America Bottling Corporation
--Long-Term Foreign Currency IDR at 'BB+';
--Long-Term Local Currency IDR at 'BB+';
--USD300 million senior unsecured notes due in 2022 at 'BB+'.
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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