Fitch Assigns First-Time 'A' Rating to Arca Continental; Outlook Stable

MONTERREY, Mexico & NEW YORK--()--Fitch Ratings has assigned the following first-time ratings to Arca Continental, S.A.B. de C.V. (Arca Continental):

--Long-term Foreign Currency Issuer Default Rating (IDR) at 'A';

--Long-term Local Currency IDR at 'A'.

The Rating Outlook is Stable.

The ratings of Arca Continental reflect its leading position as a franchised bottler of Coca-Cola products in the northern and western territories of Mexico, northern region of Argentina, nationwide Ecuador, and its recent acquisition of a 53.16% equity ownership in Corporacion Lindley S.A. (Lindley) in Peru. The ratings also take into account its diversified portfolio of products and its broad distribution network in the beverage business as well as its growing participation in the sweet and salty snacks business. The company's ratings incorporate its solid financial profile characterized by high profitability margins, strong free cash flow (FCF) generation, low leverage ratios and ample liquidity. The ratings are limited by the competitive pressures in the beverage industry, cost volatility of its main raw materials, and potential changes in tax laws that could result in increases in taxes on sugary beverages.

KEY RATING DRIVERS

Solid Market Position:

Arca Continental's ratings are supported by its solid business position as the third largest bottler of Coca-Cola products in the world with operations in Mexico, Argentina, Ecuador and Peru. The company's competitive advantages have contributed to the company maintaining a leading market position in the territories where it operates through its extensive distribution network, diversified portfolio of products, continuous innovation in products and presentations, and heavy investment at the point of sale. Additionally, Arca Continental has a complementary sweet and salty snacks business with a diversified portfolio of products under the brands Bokados in Mexico, Wise in the United States, and Inalecsa in Ecuador. This business represents around 8% of its total consolidated revenues.

Fitch also believes that the company's business position is sustainable in the long term, as its territories in Mexico, its main market, benefit from favorable rates of per capita consumption of Coca-Cola products. In addition, Arca Continental's product market share position in Argentina and Ecuador has been strengthening since it began to operate in those territories; in Peru, Inca Kola is an iconic brand and the leading soft drink in the market. Fitch views that participation of the company in the beverage industry, which is more stable and less exposed to economic downturns, contributes to maintaining low volatility in revenues and profitability.

Geographical Diversification:

The ratings reflect the geographical diversification of Arca Continental's operations. After the acquisition of Lindley in Peru in September 2015, Fitch estimates that on a pro forma basis, the company's total revenues and EBITDA coming from South America will be around 39% and 33%, respectively. Fitch views this as positive to Arca Continental as it will contribute to diversification of business risk and lessen cash flow volatility. Also, Fitch considers the acquisition of Lindley as in line with the company's beverage industry expansion into contiguous territories in Latin America with growth potential. Peru should contribute with close to 14% and 13% of the total revenues and EBITDA of Arca Continental, respectively.

High Profitability:

Arca Continental has historically maintained one of the highest profitability levels among the bottlers of the Coca-Cola system. The company's ongoing initiatives to protect its profitability margins through higher average prices, operating efficiencies and synergies from integrating new territories, have contributed to mitigate pressures from the price volatility of its main raw materials (sweeteners and packaging), exchange rate effects, excise taxes on sugary beverages and weak economic environments. On a pro forma basis Fitch projects that for 2015-2016, Arca Continental's EBITDA margin, including the operations of Lindley, will remain relatively stable at around 20% to 21%. For the last 12 months as of Sept. 30, 2015, the company's EBITDA margin was around 21%.

Low Leverage:

The ratings take into account the low leverage ratios of Arca Continental across the business cycle. Fitch expects that the company's total debt-to-EBITDA and net debt-to-EBITDA will strengthen in the next two years to 1.5x and 1.0x, respectively, after the recent acquisition of Lindley. This acquisition was financed with USD910 million of bank loans and the company consolidated around USD580 million of debt from Lindley. Arca Continental's expected proceeds from its equity issuance of USD400 million, sale of non-strategic assets of Lindley for USD137 million, and use of available cash on hand for USD250 million, will be used to pay down debt after the acquisition and will contribute to improve the company's financial position in the following semester. Fitch estimates that on a pro forma basis, including a full-year of results from Lindley and the use of proceeds mentioned before for debt reduction, the company's total debt-to-EBITDA will be around 1.7x, and its net debt-to-EBITDA about 1.3x. For the last 12 months as of Sept. 30, 2015, these figures were, 2.2x and 1.6x, respectively, including a full-year of results from Lindley

Strong FCF:

Fitch expects Arca Continental's FCF generation to remain positive in the next 18 to 24 months including the acquisition of Lindley. The company's internal FCF has been historically sufficient to cover working capital requirements, capex and dividends payments. Fitch estimates that Arca Continental will have annual FCF generation capacity above MXN1.5 billion. In our base case projection, Fitch incorporates that the company's capex for 2015 and 2016, including Lindley, will be around MXN5.7 billion and MXN6.7 billion, respectively, while the annual dividend payments will be approximately MXN2.8 billion. For the last 12 months as of Sept. 30, 2015, Arca Continental's FCF estimated by Fitch was around MXN2.8 billion.

KEY ASSUMPTIONS

Fitch's key assumptions considered in the base rating case include:

--Annual results of Lindley incorporated in 2015;

--Revenue growth of 27% in 2015 and 6% in 2016;

--EBITDA margin stable at around 20% to 21% in 2015-2016;

--Annual FCF generation above MXN1.5 billion in 2015-2016;

--Net debt-to-EBITDA close to 1.5x in 2015 and 1.2x in 2016.

RATING SENSITIVITIES

Fitch does not foresee positive ratings actions over the medium term given the current rating levels.

Negative ratings actions could be triggered by the combination of one or more of the following:

--Deterioration of profitability margins below the industry's average;

--Negative FCF through the business cycle;

--Significant debt-financed acquisitions;

--Lack of strengthening in its gross and net leverage towards 1.5x and 1.0x, respectively, in the next 18 to 24 months;

--Downgrades in Mexico's sovereign rating and country ceiling.

LIQUIDITY

Ample Liquidity:

Fitch anticipates that Arca Continental's liquidity position will remain ample after the acquisition of Lindley due to the expected equity issuance, sale of non-strategic assets of Lindley, FCF generation capacity, and current cash balance. Fitch projects that Arca Continental's cash balances will be around MXN6 billion in 2016. As of Sept. 30, 2015, its cash and marketable securities were MXN11.7 billion with short-term debt of MXN11.4 billion. This amount of short-term debt will decrease in the fourth quarter of 2015 with the proceeds of the equity issuance and internal cash. Fitch also considers Arca Continental's debt maturity profile should be manageable after consolidating USD320 million and USD260 million of Lindley's senior notes due in 2021 and 2023, respectively. The company good access to bank loans and capital markets provides financial flexibility to manage its debt profile in the short- and long-term.

Fitch also rates Arca Continental on a National Scale as follows:

--National Scale Long-term Rating at 'AAA(mex)';

--National Scale Short-term Rating at 'F1+(mex)';

--Local Issuances ARCA 09-3, ARCA 09-5, ARCA 10, ARCA 10-2, AC 11, AC 11-2, AC 13 and AC 13-2 at 'AAA(mex)'.

The Rating Outlook is Stable

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993235

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Contacts

Fitch Ratings
Primary Analyst:
Rogelio Gonzalez, +52-8399-9100
Director
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst:
Allan Lewis, +506-2296-9454
Associate Director
or
Committee Chairperson:
Alberto Moreno, +52-81-8399-9100
Senior Director
or
Media Relations:
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Rogelio Gonzalez, +52-8399-9100
Director
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst:
Allan Lewis, +506-2296-9454
Associate Director
or
Committee Chairperson:
Alberto Moreno, +52-81-8399-9100
Senior Director
or
Media Relations:
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com