CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of Corporacion Lindley S.A. (Lindley):
--Local currency Issuer Default Rating (IDR) at 'BBB-'; Outlook Stable;
--Foreign currency IDR at 'BBB-'; Outlook Stable;
--US$320 million, 6.75% senior unsecured notes due Nov. 23, 2021 at 'BBB-';
--US$260 million, 4.625% senior unsecured notes due April 12, 2023 at 'BBB-'.
KEY RATING DRIVERS
Lindley's IDRs are supported by its strong business profile, as the only Coca-Cola and Inca Kola bottler in Peru. The company has a dominant market share of close to 70% of the Peruvian carbonated soft drinks market. 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. The company has also identified areas in its distribution network where additional investments may improve efficiency and increase consumption. 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. 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 these risks with currency and sugar hedges.
On April 12th, 2013, Lindley issued a USD260 million bond due 2023. About USD90 million from the proceeds was used to refinance financial leases and short-term debt, and the remaining USD170 million will fund the company's capex plan. As of September, 2013, about USD158 million of bond funds remained on Lindley's balance sheet, earmarked for investments. As of September 2013, debt/EBITDA and net debt/EBTDA were 4.6x and 3.3x, respectively. This degree of leverage is high for the rating category, but is expected to decline once the company's expansion project is completed.
Lindley opened its state of the art plant in Trujillo in 2012, the second of four plants Lindley is building as part of its investment program. This plant will increase Lindley's capacity by 30% and help the company continue its top line growth. Lindley is building a new vertically integrated plant south of Lima in Pucusana and operations are expected to commence at the beginning of 2015. Lima is the company's largest market, accounting for over 50% of its total revenue. Lindley'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.
In the LTM September 2013, Lindley's sales volume was 272 million unit cases (UC), a slight increase of 0.4% over the same period last year; in the first 9 months of 2013 volume declined by 1.2% compared to the same period in 2012 due to the economic slowdown and lower than average temperatures in Lima and in the north of Peru. Decreases in volume were experienced by all market players therefore Lindley's market share was not affected.
The decline in volume was offset by higher prices, 3% on average, resulting in revenue growth of 2.8% to PEN2.07 billion for the LTM September 2013. EBITDA adjusted for non-cash items increased to PEN364 million and EBITDA margin improved to 17.5%. EBITDA margin is expected to continue improving as new, more efficient plants become operational and old, less efficient plants are retired. Volume is expected to recover in during 4Q 2013 as a result of higher temperatures and Lindley's efforts to strengthen its presence in the market. 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 the 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 transfer 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.
RATING SENSITIVITIES
Further rating improvement is unlikely in the medium term due to Lindley's high leverage to finance its investment program. The ratings could experience downward pressure if Lindley does not deleverage to targeted net debt/EBITDA level of 3.5x. In addition ratings could be negatively affected if the sovereign environment in Peru deteriorates significantly. However, this is unlikely in the near term.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' dated Aug. 5, 2013;
--'Parent and Subsidiary Rating Linkage' dated Aug. 5, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=809553
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.