Fitch Ratings has affirmed the ratings of Coca-Cola FEMSA, S.A.B. de C.V . (KOF) as follows: --Foreign currency Issuer Default Rating (IDR) at 'A'; --Local currency IDR at 'A'; --National scale long-term rating at 'AAA(mex)'; --National scale short-term rating at 'F1+(mex)'; --Senior notes for USD1 billion due 2018 at 'A'; --Senior notes for USD500 million due 2020 at 'A'; --Senior notes for USD750 million due 2023 at 'A'; --Senior notes for USD400 million due 2043 at 'A'; --Certificados Bursatiles for MXN7,500 million due 2023 at 'AAA(mex)'. Key Rating Drivers In a release on December 13 , Fitch noted that KOF's ratings reflect the company's substantial free cash flow (FCF) generation across the cycle, solid financial position, ample financial flexibility and strong business profile. The ratings also incorporate the company's strategic relationship with The Coca-Cola Company (KO; rated 'A+'/Outlook Stable) and the explicit and implicit financial support KOF has received from KO. In addition, the ratings consider the geographical diversification of the EBITDA generated outside of Mexico and Fitch's expectation of a strengthening of its credit metrics in the following years after its recent acquisitions. The ratings are constrained by the highly competitive nature of the beverage industry, the economic volatility present in its territories, higher debt levels, and the effect of a new MXN1 tax per liter on beverages with sugar content that would have a negative outcome on the company's sales volume in Mexico . Strong Business Profile KOF's ratings are underpinned by its solid business position as the largest franchise bottler in the world of Coca-Cola products with operations across Latin America and the Philippines . The company's strong brand image of Coca-Cola products, extensive well developed distribution network, broad and diversified product portfolio and superior execution at the point of sale, contribute to support its leading position across the markets where it operates in the long term. Fitch also considers that KOF benefits from participating in a sector relatively less exposed to negative economic cycles than other industries. Geographic Diversification KOF's presence in Latin America provides the company with geographical diversification of revenues and EBITDA generation that lowers business risk and cash flow volatility. Considering the effect of the recent acquisitions in Brazil of Companhia Fluminense de Refrigerantes, S.A. ( Companhia Fluminense ) and Spaipa, S.A. Industria Brazileira de Bebidas (Spaipa), Fitch estimates on a pro forma basis, that the company will increment the importance of its operations in South America contributing approximately with 58 percent of total sales and 52 percent of total EBITDA. For the latest 12 months (LTM) ended September 30 , the operations from South America represented around 54 percent of total sales and 47 percent of total EBITDA. Expected Deleverage Fitch incorporates that leverage will gradually decline in the following years approaching historical levels after the recent acquisitions in Brazil of Fluminese and Spaipa. On a pro forma basis, including the effect of these acquisitions, Fitch estimates that KOF's total debt to EBITDA and net debt to EBITDA, will increase to approximately 2.0x and 1.6x, respectively, by the year- end 2013. Fitch expects that KOF's gross leverage and net leverage will strengthen in the following two years to levels around 1.5x and 1.3x, respectively, through higher EBITDA generation and/or debt reduction. For the last 12 months as of September 30 , the company's total debt to EBITDA was 1.6x, while net debt to EBITDA was 0.7x. Ample Liquidity Position KOF has historically maintained an ample liquidity position with high cash balances and manageable debt amortizations. Fitch estimates that the company cash balance will reach around MXN13 billion by year end 2013, considering the closing of the acquisition of Spaipa and the refinancing of a portion of its current debt with the proceeds from the USD2.15 billion senior notes issuances obtained in November 2013 . This level of cash combined with internal cash flow generation of the company should be sufficient to face debt maturities in the following three years. In addition, Fitch considers that the company has ample access to capital markets and credit facilities which provide additional financial flexibility. Strong FCF Generation Fitch expects KOF's FCF to remain strong over the cycle. During the last five years, the company's FCF estimated by Fitch after covering capital expenditures and dividends has averaged annually around MXN5.5 billion. Fitch believes that KOF's FCF generation provides financial flexibility across the ups and downs of economic cycles to maintain a conservative capital structure. Stable Operating Performance During the first nine months ended September 30 , net sales increased 3 percent to MXN110 million, while total volume increased 4 percent to 2,323 million unit cases, when compared to the same period of last year. On a comparable basis, excluding the effect of recent acquisitions, KOF's revenues and volume growth was 1 percent, reflecting a slight decline of volume in the territories of Mexico and Brazil and the effect of devaluation of currencies from its South American operations. Consolidated EBITDA margin has been relatively stable at levels around 18 percent. Higher profitability in Mexico and Central America has compensated the decrease in operating margins from South America . Excise Tax Manageable Fitch expects that KOF's sales volume in Mexico could decline close to 7 percent in 2014 following the MXN1 per liter excise tax on beverages with sugar content approved by the Mexican Congress . The effect of this tax is expected to be transferred to consumers resulting in an increase in average sales prices between 12 percent to 15 percent. Fitch considers that the company's price initiatives, productivity efficiencies and flexible product portfolio should contribute to maintain relatively stable their profitability and financial position. Rating Sensitivities Downgrade pressures in the ratings could be triggered if KOF's leverage ratios in the following 18 to 24 months are above Fitch's expectation or by a change in the company's long-term capital structure that materially deviates from its historical levels. After the recent acquisitions, Fitch does not foresee any positive rating action over the medium term. Additional information is available at 'fitchratings.com '. Applicable Criteria and Related Research : --'Corporate Rating Methodology' (August 5); --'National Scale Rating Criteria' (October 30). Applicable Criteria and Related Research : Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=715139 National Scale Ratings Criteria http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=720082 Additional Disclosure Solicitation Status http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=811804 ((Comments on this story may be sent to firstname.lastname@example.org ))
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