Fitch Ratings has affirmed the following ratings of Arcos Dorados B.V.
(AD) and Arcos Dorados Holdings Inc. (Arcos):
--Foreign currency Issuer Default Rating (IDR) at 'BBB-';
--Local currency IDR at 'BBB-'.
--Foreign currency IDR at 'BBB-';
--BRL675 million senior unsecured Brazilian-real notes due 2016 at
--USD473.767 million senior unsecured notes due 2023 at 'BBB-'.
The 2016 and 2023 notes issued by AD Holdings are guaranteed jointly and
severally, unconditionally and irrevocably, by all relevant subsidiaries.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect Arcos' solid consolidated financial profile, with
consistent and stable operating margins, moderate leverage and
comfortable liquidity. The company's cash flow generation capacity is
concentrated in investment-grade countries, which adds some stability to
the results. The ratings also consider Arcos' geographic diversification
and business strength as the largest McDonald's franchisee in the world
with operations across 20 countries in Latin America, the strength of
McDonald's franchise, and its longstanding relationship with Arcos'
owners and management. The company's exposure to high transferability
risk in its operations in Venezuela and Argentina, negative free cash
flow (FCF) pressured by its expansion plan, and strong competition are
also factored into the ratings.
Arcos is the indirect holding company of AD. Arcos' ratings assume all
its debt issuances would be fully and unconditionally guaranteed by AD
and the relevant operating companies, and will rank pari-passu with AD's
senior unsecured debt.
MFA with McDonald's:
Arcos is the largest McDonald's franchisee in the world in terms of
system-wide sales and number of restaurants. The company purchased the
Latin American operations of McDonald's in August 2007 by signing a
Master Franchise Agreement (MFA) for 20 years with renewable options.
The MFA sets strict strategic, commercial and financial guidelines for
the operations of Arcos, which support the operating and financial
stability of the business as well as the underlying value of the
McDonald's brand in the region. As of December 2013, the company
operated or franchised 2,062 McDonald's-branded restaurants, 348 McCafe
units and 2,257 Dessert Centers. About 75% of the restaurants are
operated by Arcos, and the remaining 25% are franchised restaurants.
Stable Operating Margins:
Arcos has been successful in preserving its operating margins across
countries with different macroeconomic conditions. AD generated about
USD4 billion in revenues as of the LTM ended March 31, 2014, and USD325
million in EBITDA (USD526 million in EBITDAR) a decrease of 1.5% and
5.1%, respectively, when compared to 2013. Fitch extrapolates AD's
revenues at USD3 billion and EBITDA at USD209 million for the period
when excluding Arcos' operations in Argentina and Venezuela.
Growth in comparable sales (higher average check) of 11.2% and a
combination of 114 net restaurant openings in 2013 and the conversion of
10 franchised restaurants into company-operated ones since Jan. 1, 2012
led to an increase in Arcos' revenues of 6.2% to USD4 billion in 2013.
EBITDA increased 4.4% to USD343 million. The company's cash generation
is concentrated in investment-grade countries. In the LTM ended Mar. 31,
2014, Brazil represented 46% of the company's consolidated revenues and
71% of EBITDA. SLAD contributed 31% of EBITDA, NOLAD 8%, and Caribbean
20%. Arcos is still in the midst of recovering its operating performance
Arcos has a comfortable liquidity position and a manageable debt
maturity profile. Cash and marketable securities was USD126 million as
of March 31, 2014, and total adjusted debt was about USD2 billion,
including off-balance-sheet debt of USD1 billion related to rental
expenses. Cash covered short-term debt of USD79 million by 1.6x.
Liquidity also benefits from a USD75 million committed credit facility.
The company faces a BRL675 million bullet maturity in 2016; the next
bullet maturity occurs in 2023. These two issuances represented 89% of
total on-balance-sheet debt.
Leverage Should Remain Moderate:
Arcos was able to preserve relatively stable leverage ratios over the
past few years, despite a high level of investments. In the LTM ended
March 2014, the company reported a net debt/EBITDA ratio of 2.2x, while
its net lease adjusted debt/EBITDAR ratio was 3.9x. These ratios compare
with an average of 1.6x and 3.4x, respectively, from 2010 to March 2014.
Fitch does not expect a reduction in leverage ratios in the next few
years, as the company will continue its expansion plan, and its net
lease adjusted debt/EBITDAR should remain around 3.5x. Excluding EBITDA
from Venezuela and Argentina, Fitch estimates that Arcos' net lease
adjusted debt/EBITDAR was 4.4x.
Capex and Dividends Pressure FCF:
Under the MFA, over the next three years Arcos is required to open a
minimum of 250 stores and invest at least USD180 million, which in
Fitch's view the company can manage. Arcos generated USD240 million in
funds from operations (FFO) in the LTM ended March 2014, and USD191
million of cash flow from operations (CFFO). These numbers compare with
USD266 million and USD217 million, respectively, in 2013. CFFO was
insufficient to cover capital expenditures of USD313 million and
dividends of USD50 million. Therefore, FCF was negative USD156 million
in the period. The company's strategy is to open 90 restaurants in 2014
(gross openings) with investments of USD200 million. Fitch expects FCF
to improve in 2014 but still be negative despite decreased capex of
High Transferability Risk in Venezuela and Argentina:
Arcos is exposed to high transferability risk in its Venezuelan
operations. Restrictions imposed by the Venezuelan Central Bank have
limited the U.S. dollar supply in that country, which constrains the
repatriation of available cash and restricts payment for imported goods
as well as royalties. Following measures announced by the local
government, Arcos obtained a temporary waiver to reduce royalty payments
to McDonald's Corporation in 2012, 2013, and 2014. Venezuela represented
about 10% of total sales in 2013. Arcos is also exposed to
transferability risk with its Argentine operation. However, this risk is
partially mitigated by the fact that its local operation does not
generate excess cash, as Arcos' headquarters is based in Argentina.
Strength of McDonald's Franchise
The ratings also incorporate the strength of McDonald's as franchisor
and its longstanding relationship with Arcos' owners and management.
Arcos' controlling shareholder was the joint venture partner of
McDonald's in Argentina for close to 30 years and served as president of
the McDonald's South America division from 2004 until the acquisition.
On average, the management team has worked for over 20 years at
McDonald's. Under the terms of the MFA, McDonald's has a call option to
repurchase its assets in the region under certain events. Terms of the
notes specify that these funds should be applied to debt repayment. The
call option price is set as the fair market value of all assets of the
operating companies (80% in the case of a material breach), minus debt
at operating company and contingencies, plus cash. The MFA requires all
group companies to remain current on their financial obligations to
avoid a material breach of the agreement.
Ratings could be negatively affected by higher than expected investments
and dividends, pressuring FCF and leverage ratios. Additional factors
that could lead to a consideration of a Negative Outlook or a downgrade
include: inability of Argentine and Venezuelan operations to be
self-sustaining; weak performance in Brazil; significant deterioration
of same store sales; failure to comply with the terms of the MFA; and/or
a consolidated net lease adjusted debt-to-EBITDAR ratio significantly
above 3.5x on a sustained basis.
Net lease adjusted leverage is high for the category; therefore, a
positive rating action is not likely in the near term. Ratings could be
positively affected by higher than expected cash generation from
investment-grade countries (i.e. faster growth in Brazil; sound recovery
of Mexico's performance) that would lead to a material improvement in
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
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Source: Fitch Ratings