Fitch Affirms Coca-Cola Icecek at 'BBB'; Outlook Stable

LONDON & MILAN--()--Fitch Ratings has affirmed Turkey-based Coca-Cola Icecek A.S.'s (CCI) Long-term foreign and local currency Issuer Default Ratings (IDR) and senior unsecured rating at 'BBB'. The Outlook on the IDRs is Stable.

The affirmation of CCI's ratings reflects Fitch's expectation that the company will maintain EBITDA growth momentum and conservative credit metrics despite the weaker spending power of Turkish consumers and risk of cash flow absorption from sustained investments in manufacturing capacity and coolers. The existing shareholder distributions policy also supports cash flow. The operational ties and scope for more tangible support by The Coca Cola Company (TCCC, 'A+'/Negative) should this be needed, further underpin the rating. M&A activity represents a possibility but adverse effects on credit quality are mitigated by a conservative track record. The rating is constrained by CCI's size and its exposure to currency risk.

KEY RATING DRIVERS

Strong Coca-Cola Bottler

CCI is the sixth largest bottler in the Coca Cola system and a key vehicle for TCCC's expansion into the Middle East and Central Asia. Since 2007, CCI has been investing heavily in terms of capex and M&A to grow TCCC's franchise in these regions. Thanks to strong and growing cash flow from operations, these investments have had limited adverse effects on CCI's credit metrics though. Also, CCI's results have shown resilience to economic cycles and the company's net debt/EBITDA has remained within 1.5x and 2.3x over 2009 - 2013.

Volumes, Mix Drive Growth

CCI's performance should continue to benefit from consistent volume and price per unit case growth, driven by a young population, relatively low soft drinks penetration in its countries of operations and the ability to push sales growth, particularly in Turkey, on the more profitable 'immediate consumption' channel. Although volume growth has been easing in Turkey since 2011, consolidated EBITDA has maintained growth rates of at least high single digit.

Weaker, Still Solid Performance

In 9M14 consolidated net revenue (+5.8% in Turkey, and +14% in the international segment) increased by 17.2% mainly thanks to the strong performance of the international operations. However, EBITDA of CCI's Turkish business contracted by 10% as a result of a deliberate decision up until October, to keep prices at affordable levels. For FY14 and FY15 we expect CCI's EBITDA margin to suffer from continued consumer weakness in Turkey but to be able to maintain overall growth.

Limited Deleveraging Prospects

Despite the expected margin weakness anticipated for 2014, our projections factor in steady operating performance in 2015 which, together with high expansion capex (around 12% of sales) and working capital investments and dividends could lead to slightly negative FCF. This profile of cashflow, if maintained, will translate into limited future deleveraging capacity, and so the ratings factor funds from operations (FFO) adjusted net leverage between 2.0x and 2.2x and FFO fixed charge cover above 7.0x. These are strong credit ratios for the rating and relative to other Coca-Cola bottlers which should help absorb any external shocks affecting demand such as exposure to geopolitical events in certain markets where CCI operates, or FX risks.

Forex Exposure and Mitigation

Against a majority of CCI's debt denominated in dollars at end-September 2014, cash flow remains generated mainly in Turkish lira and other Middle Eastern and Central Asian currencies. The company is consequently vulnerable to an appreciation of the USD. CCI's credit metrics have proven good ability to recover from periods of TL depreciation. However, as a reference, Fitch calculates that in the two theoretical scenarios of a 30% devaluation of TL and of a simultaneous devaluation of all of its currencies of operation against the USD, its lease-adjusted FFO adjusted net debt ratio could suffer an adverse effect of between 0.4x and 0.7x. The company has however demonstrated historically that it is able to put in place counter-effective measures such as raising its sales prices and scaling down capex that mitigate these effects.

Ratings Incorporate Implied TCCC Support

While the legal linkages between CCI and TCCC ('A+'/Negative) (which owns 20.1% of CCI) are weak, the operational and strategic relationship (CCI represents an entry point to fast-growing markets, brand support and sale of concentrate) between the two companies is strong and includes TCCC's influence over major decisions. This drives a one notch uplift embedded in CCI's rating.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to a negative rating action simultaneously of the Local Currency and Foreign Currency IDR include:

--A material permanent deterioration in free cash flow (FCF) generation or large acquisition leading to lease-adjusted funds from operations (FFO) adjusted net debt above 2.5 for an extended period along with FFO fixed charge coverage below 6x.

In addition, CCI's rating could be downgraded should Fitch perceive that CCI has become strategically or operationally less significant to TCCC or in the event of geopolitical developments affecting its international operations.

In case of a sharp devaluation of the Turkish lira, Fitch will look at the group's willingness and timing to undertake any necessary cash preservation measures such as dividend and capex reduction (as observed in 2009).

Finally, the Foreign Currency IDR would be downgraded in the event of a downgrade of the rating ceiling for Turkey.

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--As the highest rated corporate in Turkey, an upgrade of the IDRs is unlikely due to CCI's limited scale, diversification and forex exposure.

Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.

Applicable criteria, Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage, dated 28 May 2014, are available at www.fitchratings.com.

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=950015

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Contacts

Fitch Ratings
Principal Analyst
Ching Mei Chia
Director
+44 20 3530 1068
or
Supervisory Analyst
Giulio Lombardi
Senior Director
+39 02 8790 872 14
Fitch Italia SpA
8, Via Privata Maria Teresa
20123 Milan
or
Committee Chairperson
Pablo Mazzini
Senior Director
+44 20 3530 1021
or
Media Relations:
Elaine Bailey, +44 203 530 1153, London
elaine.bailey@fitchratings.com

Contacts

Fitch Ratings
Principal Analyst
Ching Mei Chia
Director
+44 20 3530 1068
or
Supervisory Analyst
Giulio Lombardi
Senior Director
+39 02 8790 872 14
Fitch Italia SpA
8, Via Privata Maria Teresa
20123 Milan
or
Committee Chairperson
Pablo Mazzini
Senior Director
+44 20 3530 1021
or
Media Relations:
Elaine Bailey, +44 203 530 1153, London
elaine.bailey@fitchratings.com