The Central America Bottling Corp.#s Proposed Notes Rated #BB#; Other Ratings Outlook Stable

Stocks and Financial Services Press Releases Friday January 20, 2017 08:51
MEXICO CITY--20 Jan--S&P Global Ratings

MEXICO CITY (S&P Global Ratings) Jan. 19, 2017--S&P Global Ratings said today that it affirmed its 'BB' long-term global scale corporate credit and debt ratings on The Central America Bottling Corp. (CBC). The outlook on the corporate credit rating remains stable.

At the same time, we assigned our 'BB' issue-level ratings to the company's proposed 10-year $500 million and 7-10 year $75 million equivalent in PEN senior unsecured notes.

The rating affirmation reflects our view that, despite higher debt levels than our previous forecast, CBC's key credit metrics will continue to be in line with our financial risk profile assessment. Our understanding is that the company will use the proceeds from the proposed $575 million bond issuances to refinance its $300 million senior unsecured notes while using the remaining amount to fund growth opportunities in the region, including potential acquisitions. However, we anticipate CBC will maintain a debt–to-EBITDA ratio below 3x and EBITDA interest coverage above 3x. Moreover, CBC could benefit from expanding its production capacity, mainly in Guatemala and Honduras, to continue supporting the launch of new products and formats in these markets.

Our business risk profile assessment on CBC incorporates its leading position in the Central America and the Caribbean carbonated soft drink market, supported by its renowned product portfolio and wide distribution network that reaches over 600 points of sale. CBC has strategic alliances with PepsiCo and AmBev, which provide perpetual exclusive rights to distribute and sell its products in Central America. Its strategic alliance with PepsiCo also provides CBC with the right of first refusal to purchase interest in any PepsiCo-affiliated company or bottler in the region that is offered for sale. Offsetting factors include the company's exposure to countries with a high risk operating environment, foreign currency fluctuations, and increased competition.

CBC is reformatting its product portfolio and increasing prices in an effort to offset margin pressures from regulatory tax impositions in certain markets, as well as the effect of a strong dollar in its cost structure given that more than 50% of its raw materials are denominated in this currency. Additionally, the company holds long-term agreements with suppliers maintaining certain raw material price stability. In our view, these measures will allow CBC to maintain its EBITDA margin close to 13.5%, in line with the industry's average.

We expect CBC will continue posting key credit metrics in line with our financial risk profile assessment, even considering additional debt following the proposed bonds' issuance. Based on CBC's growth prospects, historical moderate use of debt, and expected cash balance, we believe the company will maintain debt to EBITDA below 3x and EBITDA interest coverage above 3x. For the 12 months ended Sept. 16, 2016, CBC's debt to EBITDA was 2x and EBITDA interest coverage was 5.9x, in line with our forecast.

Our base-case scenario assumes the following factors for 2017 and 2018:
Low- to mid-single-digit percent Central America GDP growth on average for 2017 and 2018, supporting a stable consumption for soft drink products in the region;
Double-digit percent revenue growth for 2017 based on the company's investment plans, normalizing to low-single-digit percent revenue growth in 2018;

Capital expenditures (capex) and other investments of nearly $380 million in 2017 and $80 million in 2018. Investments are mainly related to potential acquisitions, modernization of its plants, launching of new products and coolers;

Issuance of $575 million senior unsecured notes to refinance its existing $300 million senior unsecured notes due in 2022. Incremental debt is mainly to support growth opportunities in the region including potential acquisitions; and

Dividend distributions to remain in line with previous years.
Based on these assumptions we arrive at the following credit metrics for 2017 and 2018:
EBITDA margins of about 13.5%;
Debt to EBITDA below 3x;
FFO to debt near 30%; and
EBITDA interest coverage of about 4.5x.

We continue assess CBC's liquidity as adequate because we forecast that sources of liquidity will exceed uses by at least 1.2x over the next 12 months and that this ratio will remain above 1x even if EBITDA declines by 15%.

Principal liquidity sources:
Cash and short-term investments of about $133 million as of September 2016;
Funds from operations (FFO) of about $160 million for the next 12 months; and

Net transaction inflow of $575 million dual-tranche (including $75 million equivalent in PEN). Note that the proposed transactions will be conducted under a best-effort practice and thus, the final amount is subject to change.

Principal liquidity uses:
Debt amortizations of about $320 million, which includes refinancing of its $300 million senior secured notes due in 2022;
Working capital outflows of about $25 million for the next 12 months;
Investments and capital expenditures in excess of $300 million for the next 12 months; and
Dividend payments of about $40 million for the next 12 months.
The early redemption of its existing notes due in 2022 and most of the investments, including capex, will be mainly funded with the proceeds of the proposed bond issuances.

As of Sept. 30, 2016, CBC was in compliance with its incurrence covenants, which consist of a total leverage ratio below 3x and a fixed charge coverage ratio of more than 2.5x. If CBC refinances its notes, the proposed indentures will provide headroom for the $275 million incremental debt that the company is seeking to obtain from the proposed transaction, as the new notes consider a total leverage ratio below 3.75x and a fixed charge coverage ratio of more than 2x.

The stable outlook reflects our view that CBC will maintain its debt to EBITDA below 3x and EBITDA interest coverage close to 4.5x for the next 12 months, despite incremental debt to fund its investment plan, including potential acquisitions. This, as we expect steady top line growth while EBITDA margins remain close to 13.5%, supported by an effective pricing and commercial strategy.

We could lower the ratings if CBC's growth strategy and capex result in a higher than anticipated use of debt, eroding the company's credit metrics, leading to debt to EBITDA above 3x and EBITDA interest coverage below 3x on a consistent basis.

Although unlikely in the next 12 months, we could raise the ratings if CBC achieves stable revenue growth, coupled with greater-than-expected improvement in its profitability metrics. Such an improvement could result from higher margins realized from synergies from its expansion plans, leading to debt to EBITDA trending below 2x and EBITDA interest coverage above 6x. An upgrade would also be subject to our assessment of CBC's performance under a simulated scenario of Guatemala's default.

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