Fitch Rates Atic's 2022 Note Reopening 'BB+'
Fitch Ratings has affirmed the 'BB+' foreign and local currency Issuer Default Ratings (IDRs) of Grupo Embotellador Atic S.L. (Atic). In conjunction with this rating acting, Fitch has affirmed the 'BB+' rating of Ajecorp B.V.'s (Ajecorp) USD300 million notes due in 2022. The company has announced the reopening of the 2022 notes and expects to raise an additional amount up to USD150 million.
The reopening will carry the same rating as the original deal at 'BB+.' Proceeds from the reopening are expected to be used for general corporate purposes, primarily capital expenditures and the repayment of some debt. Ajecorp's notes have been directly linked to that of its parent company, Atic, through Fitch's parent and subsidiary methodology.
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 substantially all of Atic's key operating subsidiaries. A guarantee from Atic is expected to be put in place after Atic changes its type of incorporation from a limited liability company (Sociedad Limitada) to a Corporation (Sociedad Anonima). Atic's Thailand subsidiaries are also expected to provide guarantees once government approval is granted.
The Rating Outlook for Atic is Stable
Atic's 'BB+' ratings are supported by the geographic diversification of its operations within Latin America and Thailand, the defensive nature of the beverage industry and the strong free cash flow characteristics of the industry. The company's sound positions 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 in the form of royalty payments. 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.
Strong Geographic Diversification
During the first half of 2012 (1H'12), Peru represented 32% of Atic's consolidated adjusted EBITDA. The Peruvian market is strong 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. Atic's next most important markets in terms of EBITDA contribution are Colombia (33%), Thailand (18%), Central America (16%) Venezuela (8%, and Mexico (7%). Atic's geographic diversification should increase in the future due to the company's recent entrance into the Brazilian market. The high level of geographic diversification mitigates to a degree the company's exposure to markets such as Venezuela, where economic and political uncertainty is high.
Target Markets Have Price Sensitive Consumers
Atic has a relatively small presence in each country with market shares below 20%. Its key brands are 'Big Cola' and 'Kola Real'. The company faces strong competition from Coca-Cola and Pepsi in each market it operates. Atic prices its products approximately 30% to 40% lower than the 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 targeted 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.
During 1H'12, Atic generated USD87 million consolidated EBITDA, an increase from USD61 million during the same period of 2011. Average prices increased near 8% and volumes increased 9% reaching 1.8 hectoliters during this time period, while EBITDA margins expanded to 12.4% from 10.3%. The improvement in EBITDA and margins is primarily due higher soft drink consumption levels in its main markets; the introduction of new product categories; the expansion of commercial coverage; and the introduction of new formats with higher value added. Colombia, Central America, Peru and Thailand were key drivers of EBITDA improvement, while improvement of profitability of Mexican and Brazilian operations continues to be challenging. During the last 12 months ended on June 30, 2012, Atic generated USD126 million consolidated EBITDA.
Bond Issuance During May Extended Debt Maturity Profile
As of June 30, 2012, Atic has EUR302million (USD380 million) of consolidated debt, up from EUR240 million (USD309 million) as of December 2011, and EUR66 million (USD83 million) of cash and marketable securities. This increase is in line with the USD300 million unsecured bond debt issued by the end of May by Ajecorp. Out of total consolidated debt, EUR278 million (USD350 million) is classified as long-term. About 80% of consolidated debt is U.S. dollar denominated. The proposed USD150 million bond issuance should increase debt to approximately USD480 million, as proceeds will primarily be used to finance its capital expenditures.
Net Leverage Improved During 1H'12
Atic's net debt-to-EBITDA ratio was 2.3 times (x), while its total debt-to-EBITDA ratio was 3.0x, as of June 30, 2012. In terms of net leverage, these credit metrics show an improvement with respect to Dec. 31, 2011, but are weaker than the average ratios maintained by the company during the prior three years of 2.0x and 1.8x, respectively. Management's financial strategy targets a total debt-to-EBITDA ratio of between 2.0x and 2.5x, which Fitch believes will be difficult to achieve in the near term absent a turnaround of its Mexican operations and Brazilian operations. High investments should also preclude a return to lower levels of leverage. During 2013 Atic expects to invest USD150 million and during 2014 about USD90 million. These investments are intended to expand capacity in categories such as water and juices in existing markets, as well as invest in PET and cups production lines. Looking forward, Fitch expects that Atic's net debt-to-EBITDA ratio should remain around 3.0x.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'National Ratings - Methodology Update' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria
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