Moody's Cuts Arcos Dorados (ARCO) Rating to 'Ba3'; Outlook Stable

Moody's Investors Service has downgraded Arcos Dorados Holdings Inc (NYSE: ARCO)(Arcos Dorados)´s corporate family rating and senior unsecured ratings to Ba3 from Ba2. The outlook is stable.

Ratings downgraded:

Issuer: Arcos Dorados Holdings Inc

- Corporate Family Rating: to Ba3 from Ba2

- USD 475 million Senior Unsecured Notes due 2023: to Ba3 from Ba2

- BRL 675 million Senior Unsecured Notes due 2016: to Ba3 from Ba2

RATINGS RATIONALE

The downgrade to Ba3 was prompted by Arcos Dorados' weaker than expected credit metrics and liquidity profile, mainly due to the recent adjustment in theVenezuelan official exchange rate and ongoing depreciations of other currencies in the region, such as the Argentine Peso and the Brazilian Real. The downgrade to Ba3 also considers lower operating margins, which partly stem from declining restaurant traffic, particularly in Brazil.

Going forward, Moody's will closely monitor the company's cash flow generation and its ability to reduce capex without compromising organic growth and overall credit metrics. The sustainability of credit metrics with the ongoing weakening of most of the local currencies against the US dollar in the region is another key rating consideration.

Arcos Dorados rating is supported by the company's status as McDonald's master franchisee in Latin America, which affords it a leading position and broad geographic footprint in the region, along with a growing fast food restaurant segment among the informal eating out market. Moody's believes that the company's rights to use McDonald's strong brand name and proven operating procedures as a master franchisee, an expected close strategic alignment with McDonald's, and the industry experience of the company's management provide a solid basis to pursue growth opportunities and expand its earnings base across the region.

Credit negatives partly offsetting these strengths include Arcos Dorados' currency exposure, relatively high lease-adjusted leverage, concentration of cash flows in a limited number of markets with increasing dependency on its Brazilian subsidiary, and performance challenges in Mexico. Arcos Dorados is also exposed to Argentine's country risk and subject to certain minimum investment requirements and financial covenants under its Master Franchise Agreements (MFAs).

The stable ratings outlook reflects Moody's expectation that revenue growth and operating margins will not deteriorate significantly despite the challenging operating macroeconomic environment expected for some of the countries in the region for next year, including Brazil and Argentina. It is also based on the assumption that the company will maintain close to breakeven or positive free cash flow generation, with long-term investment spending in line with available internal cash flow generation.

Although unlikely in the near term, the ratings could experience upward pressure if better than anticipated cash flow generation and prudent financial policies cause a material and sustainable strengthening of credit metrics, with lease-adjusted Debt/EBITDA dropping to close to 4.0 times and EBIT/Interest rising towards 3.0 times. An upgrade would likely also require solid progress in turning around its operations in Mexico and acceptable levels of country risk in relevant markets subject to weak sovereign credit quality.

Downward pressure on ratings could occur if Arcos Dorados' free cash flow turns negative over an extended period of time, for example, because of a combination of margin pressures and aggressive investment spending, and if as a result credit metrics weaken substantially such that Debt/EBITDA exceeds 5.5 times or EBIT/Interest falls below 1.5 time. A significant and ongoing weakening of local currencies and/or further tightening of currency controls in Venezuela and Argentina, could also place pressure on the ratings.

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