Fitch Affirms Bepensa's IDR at 'BBB'; Outlook Stable

MONTERREY, Mexico--()--Fitch Ratings has affirmed Bepensa S.A. de C.V.'s (Bepensa) ratings as follows:

--Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BBB';

--Long-Term Local Currency IDR at 'BBB';

--Long-term National scale rating at 'AA+(mex)'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Strong Beverage Business:

Bepensa's ratings reflect the solid business position of its main subsidiary, Bepensa Bebidas, S.A. de C.V. (Bepensa Bebidas), which has a long and successful track record of profitability as a bottler operator of Coca-Cola's products in the territories of the Yucatan Peninsula and Dominican Republic. Bepensa Bebidas has the leading market share position in its territories, supported by a well-diversified portfolio of leading brands and extensive beverage distribution system. Fitch believes these factors will contribute to maintaining its leading business position over the long term despite the highly competitive environment of the beverage industry.

In addition, Bepensa Bebidas's business includes a relevant brand in the ready-to-drink alcoholic category, known as Caribe Cooler, which was acquired back in 2015. This beverage has a nationwide presence and is highly recognized among consumers. Fitch believes that in the mid- to long-term this category could represent a new avenue of growth for the company and provide further product diversification to its current beverage portfolio. During 2015, Bepensa Bebidas' operations, including Caribe Cooler, represented close to 78% and 70% of the Bepensa's consolidated revenues and EBITDA, respectively.

The ratings of Bepensa also take into account the operations of its industrial and financial services businesses segments, which contribute approximately 19% and 3%, respectively, of its consolidated revenues.

Financial Business Limits Ratings:

Bepensa's ratings are constrained by the strong parent-subsidiary relationship between Bepensa and its fully owned subsidiary and financial arm Financiera Bepensa S.A. de C.V. SOFOM, ENR. (Finbe; 'AA-(mex)'). In Fitch's view, this business has a higher risk profile than the company's core business (beverages). The growth of the credit portfolio demands higher working capital and pressures free cash flow (FCF) generation, which increases the company's financial risk during an adverse economic environment in Mexico. Around 28% of Bepensa's total debt as of March 31, 2016, was associated with Finbe's operations.

Improvement in Operating Results:

Fitch expects Bepensa's operating performance to maintain a positive growth trend in 2016-2017. During 2015, the company's consolidated revenues increased around 12% compared to the previous year, while its EBITDA margin improved to 17% from 15%. The beverage business was the main contributor to the increase in revenues as a result of volume growth and higher average prices in Mexico and Dominican Republic and the integration of Caribe Cooler since April 2015. In terms of profitability, the company's internal initiatives to rationalize its SKUs and reduce costs and expenses were the main drivers behind the margin expansion. Fitch expects that for 2016, Bepensa's consolidated revenues will grow to close to 12% and have an EBITDA margin around 16%.

Lower Leverage:

Fitch projects that Bepensa's consolidated total debt/EBITDA will decline to 2.0x in 2016 and around 1.5x in 2017. Following the debt-financed acquisition of Caribe Cooler in 2015, the company has showed gradual deleveraging through the reduction of total debt and higher EBITDA generation. For the last 12 months (LTM) as of March 31, 2016, Bepensa's total debt/EBITDA was 2.1x while its net debt/EBITDA was 1.9x. The company's consolidated total debt was MXN4.8 billion as of March 31, 2016.

Positive FCF:

Fitch projects that Bepensa will maintain positive consolidated FCF for 2016-2017. Over the last two years the company has reported solid consolidated FCF generation averaging over MXN1 billion after covering capex and keeping its working capital requirements in its financial business relatively stable. The company's estimated capex for 2016 and 2017 is expected to be close to MXN800 million, while dividend payments should resume in 2017. For the LTM March 31, 2016, Bepensa's FCF was MXN839 million after covering capex of MXN880 million.

KEY ASSUMPTIONS

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

--Revenue growth of 12% in 2016 and 5% in 2017;

--EBITDA margin at around 16% in 2016 and 17% in 2017;

--Average FCF of MXN835 million in 2016-2017;

--Total debt/EBITDA and net debt/EBITDA close to 1.5x and 1.0x, respectively, by 2017.

RATING SENSITIVITIES

A positive rating action could be considered if Bepensa decreases its total debt/EBITDA to historical levels as a result of an improvement in operating results or debt reduction; or consistently generates positive FCF and eliminates or decreases its linkage with Finbe.

Negative rating actions could arise as a result of a deterioration of its operating performance in the beverage business, higher working capital requirements due to uncollectible accounts at Finbe, or a debt-financed acquisition leading to total debt/EBITDA above 2.5x on a sustained basis.

LIQUIDITY

Manageable Liquidity:

Fitch believes Bepensa has the flexibility to face its short-term debt amortizations by managing the working capital requirements of its financial services division and its capex. As of March 31, 2016, the company had cash balances of MXN666 million, annual funds from operations estimated by Fitch of MXN1.7 billion, and short-term debt of MXN2.7 billion. Upcoming debt maturities in 2017, 2018 and 2019 are approximately MXN737 million, MXN839 million and MXN580 million, respectively. Fitch takes into consideration that a high portion of its short-term debt is refinanced every year, as it is associated with its financial service business.

Additional information is available at 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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008651

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008651

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Rogelio Gonzalez
Director
+52 81 8399 9100
Fitch Mexico S.A. de C.V.,
Prol. Alfonso Reyes 2612, 8th Floor, Monterrey, N.L., Mexico
or
Secondary Analyst
Maria Pia Medrano
Associate Director
+52 55 5955 1600
or
Committee Chairperson
Alberto Moreno
Senior Director
+52 81 8399 9100
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rogelio Gonzalez
Director
+52 81 8399 9100
Fitch Mexico S.A. de C.V.,
Prol. Alfonso Reyes 2612, 8th Floor, Monterrey, N.L., Mexico
or
Secondary Analyst
Maria Pia Medrano
Associate Director
+52 55 5955 1600
or
Committee Chairperson
Alberto Moreno
Senior Director
+52 81 8399 9100
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com