CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded, removed from Rating Watch Negative and assigned a Stable Rating Outlook to the following ratings on Embotelladora Andina (Andina):
--Long-term local and foreign currency IDR to 'A-' from 'A';
--Senior Unsecured Notes due in 2027 to 'A-' from 'A';
--Long-term National Scale Rating to 'AA(cl)' from 'AA+(cl);
--Senior unsecured Notes to 'AA(cl)' from 'AA+(cl)'.
In conjunction with these rating actions, Fitch has affirmed Andina's equity rating at Nivel '2(cl)'.
KEY RATING DRIVERS
Rising Leverage due to Acquisition
The rating downgrades are due to Andina's purchase of Companhia de Bebidas Ipiranga (Ipiranga) for approximately BRL1.2 billion (USD510 million) during the middle of September, following the recent of approval for the transaction by The Coca Cola Co. and the Brazilian anti-trust agencies, Conselho Administrative of Defesa Economica' (CADE). Ipiranga is a Coca-Cola bottler that has bottling territories in the Brazilian states of Sao Paulo and Minas Gerais. In the announcement, Andina stated that Ipiranga generated BRL112 million (CLP 25 billion) of EBITDA during 2012 on revenues of BRL695 million. The acquisition of Ipiranga increase Andina's net leverage to approximately 2.0x on a pro forma basis. This degree of leverage is materially higher than the 0.12x average net debt/EBITDA ratio maintained by the company from 2008 to 2012.
More Aggressive Approach to Acquisitions & Increasing T&C Risk:
The downgrades also consider Andina's more aggressive approach to inorganic growth recently. During October 2012, Andina merged with Coca Cola Polar (Polar), which had higher leverage. This acquisition came on the heels of the company's acquisition of a 40% stake in the Brazilian bottler Sorocaba Refrescos S.A. (Sorocaba) during August 2012 for BRL145 million. The downgrades further factor increased transfer and convertibility risk (T&C) for Andina, as an increasing portion of the company's cash flow will come from Brazil, which is rated 'BBB' and has a country ceiling of 'BBB+'.
Ipiranga Financing with Debt and Refinancing Activities
Andina expects to fund the transaction with the issuance of cross border debt. If needed, to anticipate funds, Andina has approved a USD600 million bridge loan. In addition to these debt obligations, Andina successfully placed a CLF5 million bond (approximately USD225 million) in the local market on Sept. 4. Approximately 50% of the proceeds from this issuance will be used to refinance debt maturities, while the remaining portion of the bond will be used for general corporate purposes, including capex among others. As of June 31, 2013 Andina had CLP315 billion total debt (USD630 million), of which CLP139 billion was classified as short-term (44%). Fitch estimates after the acquisition of Ipiranga and the bond issuance in the local market, Andina should end 2013 with USD1.2 billion of debt. After refinancing activities, Andina is expected to extend its debt amortizing profile, with amortization installment in the range of USD50 million per year.
Intensive Capital Expenditure Program
During 2013 and 2014, Andina is implementing an intensive capex program, with expected investments of approximately USD325 million per year. Higher investments in Chile mainly relate to logistics needed to support distribution from the Nueva Renca plant, bottles, cold assets and some equipment related to the new plant which started operations during 2012. In Brazil, the investment relates to land for a new plant that is needed as a result of increased consumption. Andina is also investing in new technology for its joint ventures with Coca-Cola in Chile, Vital Aguas and Vital Jugos.
Favorable Performance of Latin-American markets
During LTM ended on June 2013 Andina generated CLP233 billion EBITDA, up from CLP207 billion EBITDA during December 2012. EBITDA margins remain relatively constant at approximately 17%. The LTM figures consider the consolidation with Coca Cola Polar for nine months, which added CLP33 billion EBITDA. The depreciation of the Brazilian real and the Argentinean peso against the Chilean peso has contributed to a decline in the EBITDA - excluding Coca Cola Polar - during the LTM, as the company's markets have performed relatively well. In Chile Andina has benefitted from lower sugar costs, while in Argentina higher market share and prices have helped to offset the impact to increasing labor costs. Also the company has been investing in machinery and equipment in that country.
Markets Diversification
Andina is one of the largest Coca-Cola bottlers in the world. It is the leading producer of soft drinks in Chile and the second largest producer in Brazil and Argentina. The company also has a strong presence in Paraguay. On pro forma basis, considering 12 months of operations of Kopolar, Andina generated CLP251 billion EBITDA, and sold 720 million of unit cases. In terms of EBITDA, Chile represented 40%, Brazil 33%, Argentina 19% and Paraguay 8%. On a pro forma basis, after the acquisition of Ipiranga, Brazil and Chile should generate 38% and 36% of consolidated Ebitda, respectively, followed by Paraguay and Argentina with 8% and 19%. The Coca-Cola Company owns 14.65% of Andina's equity.
RATING SENSITIVITIES
Andina's Outlook is Stable as Fitch expects that leverage should be around 2.0x through the end of 2014. Fitch also does not foresee Andina returning to as strong of a capital structure as was maintained in the past due to its more aggressive approach to inorganic growth. This will limit upward rating actions. If Fitch believes that leverage could remain in excess of 2.0x for a sustained period of time, additional negative rating actions could occur. Andina's ratings could also be negatively affected if the sovereign ratings of Brazil deteriorate, as the percentage of the company's EBITDA that is being generated in Brazil is now around 40%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
-- 'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=801889
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