CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' foreign currency and local currency Issuer Default Ratings (IDRs) of Grupo Embotellador Atic S.A. (Atic). In conjunction with this rating action, Fitch has affirmed the 'BB+' rating of Ajecorp B.V.'s (Ajecorp) USD450 million notes due in 2022. The rating of the notes has been directly linked to that of its parent company, Atic, in accordance with Fitch's Parent and Subsidiary Rating Linkage criteria.
Ajecorp is a wholly owned subsidiary of Atic and is incorporated in the Netherlands as a limited liability company. The 2022 notes of Ajecorp are unconditionally guaranteed by Atic and its key operating subsidiaries. Atic's guarantee was put in place after the company changed its type of incorporation from a limited liability company (Sociedad Limitada) to a Corporation (Sociedad Anonima). Atic's Thailand subsidiaries also provided guarantees.
KEY RATING DRIVERS
Atic's 'BB+' ratings are supported by the geographic diversification of its operations within Latin America and Thailand, the resilient nature of the beverage industry to cyclical downturns, and the industry's free cash flow characteristics. The company's sound position within the 'B' brand segments of most of the markets in which it operates, as well as its moderate levels of leverage, also support the ratings.
Strong competition within the beverage industry and the volatility of raw material costs are among the factors that limit Atic's ratings to 'BB+'. The company's corporate structure is also considered a credit weakness. Atic's controlling shareholders, the Ananos family, directly own the formulas for the beverages produced by the company, which results in the transfer of some operating profits to the shareholders from royalty payments. Royalties are limited by the bond indenture to USD5 million. The controlling shareholders also own another beverage company, Callpa Limited, which produces and sells beverages in several Asian countries. The shareholders may have to support the nascent operations of Callpa Limited, which could indirectly impact the credit quality of Atic.
Sound Geographic Diversification
As of June 30, 2013, Peru represented 32% of Atic's consolidated adjusted EBITDA. The Peruvian market is important for the company, as historically it has been a non-cola market, which benefits 'B' brand producers, as they rely heavily upon non-cola products. In addition to Peru, Atic's most important markets in terms of EBITDA contribution are Colombia (38%) followed by Thailand (7%), Central America (20%), Venezuela (12%) and Mexico (12%). The level of geographic diversification mitigates to a degree the company's exposure to markets such as Venezuela, where economic and political uncertainty is high. The recent entrance of Atic in the Brazilian market continues to be challenging due to the strong competitive environment and the small size of its operations.
Target Markets Have Price-Sensitive Consumers
Atic has a relatively small presence in each country, with market shares below 18%. The company faces strong competition from Coca-Cola and Pepsi in each market in which it operates. Its key brands are 'Big Cola' and 'Kola Real'. Atic prices its products approximately 20% to 40% lower than Coca-Cola's products and competes directly against other producers of non-branded products in the 'B' brand segment of the market. The company's target customers are price-sensitive consumers in the lower economic classes.
Atic's distribution model varies across countries. In Peru and Thailand, Atic primarily operates its own distribution network. In Colombia, Central America and Venezuela, the company relies more heavily on third parties. Nearly 90% of its consolidated sales occur at mom-and-pop stores.
Strong Growth During 2012, Moderate Trend for 2013
After a strong performance in 2012, with 6.3% volume growth and 15% price increase, growth is moderate during the first half of 2013. For the LTM ended June 30, 2013, EBITDA reached EUR107 million, down from EUR117 million during 2012. During the six months of 2013 average prices increased 1.2% while volumes decreased 1.0%. Lower volume is mainly a result of contractions in Thailand (-17.7%), Peru (-6.2%) and Brazil (-42.6%) while Colombia and Central America (CAM) experienced growth of 17% and 4.9%, respectively. In Thailand low volumes are a result of competitive pressures while Peruvian operations were affected by lower carbonated soft drink (CSD) consumption due to a colder winter, economic uncertainty, and a strike during 1Q'13. Brazil and Mexico continue to prove challenging as competition is strong, but performance in both markets is expected to improve in 2014. On a consolidated basis, EBITDA margin was 9.8%.
Concentration in Long-Term Debt after Bond Issuance and Re-opening in 2012
As of June 30, 2013, Atic had EUR401 million of consolidated debt, which is comparable to December 2012, and EUR116 million of cash and marketable securities. Out of total debt, USD450 million is in senior unsecured notes issued by Ajecorp in 2012. Bond proceeds were used for debt refinancing (USD300 million) and capex (USD100 million), among other general corporate purposes.
Increased Net Leverage
Atic's net debt-to-EBITDA ratio was 2.6x, while its total debt-to-EBITDA ratio was 3.7x, as of June 30, 2013. In terms of net leverage, these credit metrics are weaker than the average ratios maintained by the company during the period 2008-2012 of 2.0x and 2.5x , respectively. Management's financial strategy targets a total net debt-to-EBITDA ratio of between 2.0x and 3.0x. The company should be able to remain at these levels given lower capex needs, sound cash flow generation from the Colombian and Central American markets, as well as the expected turnaround of Mexican and Brazilian operations. Fitch expects that Atic's net debt-to-EBITDA ratio should remain around 3.0x.
An increase in debt or a deterioration in cash flows from operations that materially weaken credit metrics could lead to negative rating actions. A positive rating action is not likely in the medium term as Fitch does not expect that Atic will significantly deleverage, and challenges in Brazil and Mexico remain.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2013);
--'Parent and Subsidiary Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Parent and Subsidiary Rating Linkage