Fitch Affirms Corporacion Lindley's Ratings
Fitch Ratings has affirmed the following ratings of Corporacion Lindley S.A. (Lindley):
-- Local currency Issuer Default Rating (IDR) at 'BBB-';
-- Foreign currency IDR at 'BBB-';
-- US$320 million, 6.75% senior notes due Nov. 23, 2021 at 'BBB-'.
The Rating Outlook is Stable.
The ratings continue to be supported by Lindley's strong business profile, as the only Coca Cola and Inka Cola bottler in Peru. The company has a dominant market share of close to 70% of the Peruvian carbonated soft drinks market. In 2012, Lindley continued to benefit from strong economic growth in Peru. The company also enjoys the implied support and technical expertise of The Coca Cola Corporation (TCCC) which owns 38.5% of its equity. The ratings further benefit from the company's long track record of operating in Peru, its steady and predictable revenue and cash flow, and its professional management, including financial oversight by TCCC, which appoints Lindley's CFO.
The ratings are constrained by the company's large debt funded investment program designed to consolidate and increase production capacity, and replace older, less efficient machinery. As a result of the heavy capital expenditures, free cash flow is expected to be negative in the next two to three years. Fitch notes that any pressure on cash flow generation is a result of Lindley's reinvestment strategy, rather than market trends, and should result in a long-term improvement in operating cash flow. To a certain extent, the program has a discretionary component. Lindley is also exposed to currency risk related to its debt obligations that are predominantly denominated in USD and commodity risks associated with the price of sugar, resins and PET (packaging), typical for this industry. Lindley partially mitigates those risks with currency and sugar hedges.
At the end of September 2012, leverage as measured by net debt to last 12 months (LTM) EBITDA adjusted for non-cash items stood at 2.7 times (x), about half a turn better than expected, in part due to faster than expected EBITDA growth, in part due to slower reduction in cash balances caused by a few months delay in the company's investment program. Lindley raised $320 million in November last year to fund its investment program. The company has recently identified areas in its distribution network where additional investments may improve efficiency and increase consumption. Leverage may spike up again if the company increase borrowings to boost investments, but deleveraging through improving operations should continue after that. Fitch expects that net debt to adjusted EBITDA will not exceed 3.5x by the end of 2013, the same level that Fitch originally expected for 2012. This degree of leverage is high for the rating category, but is expected to decline once the company's expansion project is completed.
In 2012, the company opened its state of the art plant in Trujillo, a second of four plants that Lindley is building as a part of its investment program. When fully operational, the plant in Trujillo will increase Lindley's capacity by 30% and help the company continue its top line growth. Early next year Lindley will start building a new plant near Lima, which is the company's largest market, accounting for over 50% of the company's total revenue. The company's two existing plants in Lima are currently operating at almost full capacity. Fitch views the investment program positively given the expected benefits from increasing capacity and a lowering of the company's cost structure in comparison to its competitors.
During 2012, Lindley maintained volume growth and increased prices at pace with its rising cost and significantly above inflation. In the first nine months of 2012, revenue increased by 19% to PEN 1.5 billion from PEN 1.3 billion in the same period last year. EBITDA adjusted for non-cash items increased by 17.4% to PEN 225.8 million from PEN 192.3 million last year. EBITDA margin stood at 14.9%, a small decline form 15.1% in the first nine months of 2011. Margins are expected to improve as new, more efficient capacity becomes operational and old, less efficient equipment is retired. The new management structure put in place in 2012 and the contemplated improvements in storage and distribution systems should also help to improve efficiency in Lindley's operations.
Standalone Rating & TCCC Support:
Fitch has applied its Parent and Subsidiary Rating Linkage methodology to assign a rating to Lindley that is one notch above its standalone credit profile, as a result of moderately strong operational and strategic ties between the company and its 38.5% shareholder, TCCC, (rated 'A+', with a Stable Outlook by Fitch). Lindley is the only Coca Cola bottler in Peru. While sales in Peru represent less than 1% of TCCC's global sales volume, the market is fast-growing relative to most markets in which TCCC operates. While TCCC does not provide direct financial support to Lindley, there have been times when TCCC has stepped in to help bottlers within the 'Coke system'. Examples include providing loans, increases in equity to fund acquisitions, takeovers of distressed bottlers, and transference of foreign exchange risk from a struggling bottler to TCCC. As such, Fitch believes it likely that some form of tangible support would be forthcoming to Lindley in the event the company's financials would come under stress.
Key Rating Drivers:
Further rating improvement is unlikely in the medium term due to the elevated leverage related to the investment program. Ratings could be negatively affected if the sovereign environment in Peru deteriorates significantly. The probability of this is low in the near term, however.
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' dated Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage' dated June 14, 2010.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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