Coca-Cola FEMSA, S.A.B. de C.V. -- Moody's assigned A2 rating to Coca-Cola FEMSA's global bonds; negative outlook
Rating Action: Moody's assigned A2 rating to Coca-Cola FEMSA's global bonds; negative outlook
Global Credit Research - 25 Aug 2020
New York, August 25, 2020 -- Moody's Investors Service, ("Moody's") today assigned A2 ratings to Coca-Cola FEMSA, S.A.B. de C.V.'s ("KOF") $500 million -benchmark size- senior unsecured global bonds with 12 year proposed tenor. The proceeds will be used on green projects. Other ratings of the company are unchanged. The ratings outlook is negative.
The following ratings/assessments are affected by today's action:
New Assignments:
..Issuer: Coca-Cola FEMSA, S.A.B. de C.V. ("KOF")
....Senior Unsecured Notes, Assigned A2
The proposed issuance is aligned with the Green Bond Principles (GBP), a voluntary guideline administered by the International Capital Market Association. The proceeds will be used to finance projects aiming to mitigate climate change, increase water efficiency and foster a circular economy. In line with GBT, KOF has an internal process to select these projects and until the proceeds are fully allocated it will report the progress annually.
The new notes are senior unsecured obligations of KOF and are guaranteed by Mexican subsidiaries, in line with most of the existing debt of the group. As of June 30, 2020, less than 5% of consolidated debt was at non-guarantor subsidiary levels.
RATINGS RATIONALE
The new $500 million bond will add to the MXN11,143 (close to $485 million) incurred by KOF in short term financing to bolster its cash position during the coronavirus pandemic. The new increase in debt along with the 16.9% decline in revenues that the company expects in 2020 will lead to an increase in gross debt to EBTDA leverage. Assuming that full recovery will not occur until 2022, KOF's debt to EBITDA as adjusted by Moody's will remain above 2.0x until then. Nevertheless, the A2 rating continues to reflect Moody's view that the leverage increase will be temporary because KOF will pay off short term debt from internal sources. Net debt to EBITDA will remain stable at about 1.5x. A strong liquidity position also supports the rating. As of June 2020, cash on hand totaled $1.8 billion covering 2.5x of short-term debt. A recent liability management exercise resulted in a manageable maturity profile with no significant maturity scheduled until $1.2 billion comes due in 2030.
KOF's ratings benefit from its position as the largest Coca-Cola franchise bottler globally in terms of volume, leading market share in its markets and superior distribution capabilities. The company's ratings also reflect its strong profitability, consistent free cash flow (FCF) and healthy credit metrics. KOF's ratings incorporate a one-notch uplift to its stand-alone credit profile because of its strategic importance to the Coke system.
The negative outlook resulted from the downgrade of the Mexican Government's rating to Baa1, negative from A3, and reflects KOF's link with the Mexican sovereign given that it is headquartered in Mexico and derives the majority of its earnings from the country. Moody's believes that a weaker sovereign has the potential to create a rating drag on companies operating within its borders. Therefore, the extent to which issuers can be rated above the sovereign is limited.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook on Mexico's sovereign rating and because KOF is already rated above the Mexican sovereign rating, an upgrade of KOF's ratings is unlikely. KOF's rating is currently two notches above the Mexican sovereign rating, a situation that occurs only under exceptional circumstances, when an issuer's fundamentals are stronger than those of the sovereign. In the case of KOF, this situation is supported by the company's strong credit metrics, ample liquidity, limited reliance on the local banking system for funding and meaningful cash generation outside of Mexico. These factors mitigate KOF's links with the Mexican economy. Nonetheless, with over half of its revenue and EBITDA dependent on Mexico, KOF's ratings are still constrained by Mexico's sovereign risk.
KOF's ratings could be downgraded if the Mexican sovereign rating is lowered. Ratings could also be downgraded if KOF fails to reduce leverage as projected or if its credit metrics deteriorate materially, whether because of operating difficulties or further debt-financed acquisitions. Failure to make progress in reducing leverage toward 2.0x over the next 18 months could lead to a downgrade.
Environmental, Social and Governance Risk
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. That said, KOF and soft beverage companies in general, are likely to be more resilient than other sectors although some volatility can be expected in 2020 due to uncertain demand characteristics, channel disruptions, and the potential for supply chain disruptions.
In terms of both social and environmental considerations, KOF's environmental strategy is aligned with The Coca-Cola Company's (TCCC) commitment to a "World Without Waste." In Mexico and Brazil, KOF's packaging collection and recycling account for more than 50% of its PET bottles sold, on track with TCCC's 2030 goal of collecting 100% of the PET bottles placed in the market. Furthermore, in 2019, KOF used an average of 23.7% recycled content in its plastic bottles, in line with the 2020 goal of 25%; and is on track for the 50% goal by 2030. Efficient use of water is also part of KOF's environmental strategy. From 2010 through 2019, KOF improved its water use ratio by 22%.
In terms of governance, as a publicly listed entity KOF follows above average practices for the region regarding transparency and overall corporate governance. For instance, the company has 10 executive directors and its board of directors is comprised of 19 directors of which 9, or almost 50%, are independent members. The company follows a Code of Best Corporative Practices and a Code of Ethics. KOF has a Planning and Financial committee, Audit committee and a Corporate Practices committee. Its status as a blue-chip company in the region provides KOF access to diverse sources of funding. The company has a track record of rapidly deleveraging following major acquisitions that have historically been accretive. KOF has also maintained conservative financial policies over time. Similar to other Latin American companies, it does not maintain a committed revolving credit facility for backup purposes, but instead uses uncommitted bank lines and large cash reserves to cover unforeseen liquidity needs.
The principal methodology used in this rating was Global Soft Beverage Industry published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1053179. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Coca-Cola FEMSA, S.A.B. de C.V. (KOF) is the largest Coca-Cola franchise bottler in the world by volume. It produces, sells, markets and distributes Coca-Cola trademark beverages, including sparkling beverages (colas and flavored sparkling drinks), water and still beverages (juices, coffee, tea, milk, value-added dairy products, energy drinks, plant-based beverages and isotonic products). The company is geographically diversified; however, its largest and most profitable market is Mexico. It also operates in Brazil, its second largest market, as well as in Colombia, Uruguay, Argentina, and various Central American countries. KOF also operates in Venezuela, although results from this operation are not consolidated in the company's results. Headquartered in Mexico City, Mexico, KOF reported revenue of MXN194,471 million ($10.1 billion) for 2019.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Sandra Beltran Vice President - Senior Analyst Corporate Finance Group Moody's de Mexico S.A. de C.V Ave. Paseo de las Palmas No. 405 - 502 Col. Lomas de Chapultepec Mexico, DF 11000 Mexico JOURNALISTS: 1 888 779 5833 Client Service: 1 212 553 1653 Marianna Waltz, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 0 800 891 2518 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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