Fitch Affirms FEMSA's IDRs at 'A'; Outlook Stable

MONTERREY, Mexico--(BUSINESS WIRE)-- Fitch Ratings has affirmed FEMSA S.A.B. de C.V.'s (FEMSA) Long-Term Foreign and Local Currency Issuer Default Rating (IDR) at 'A'. In addition, Fitch has affirmed FEMSA's National scale long-term rating at 'AAA(mex)' and National scale short-term rating at 'F1+(mex)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

FEMSA's ratings reflect its solid business portfolio of leading companies in the beverage and retail industries and the stable financial profile at the FEMSA holding company with stable leverage and ample liquidity. The ratings also incorporate the sound cash flow generation capacity of its subsidiary, FEMSA Comercio, S.A. de C.V. (FEMSA Comercio), and the reliable flow of dividends received from its subsidiary Coca-Cola FEMSA, S.A.B. de C.V. (KOF, 'A-'/Outlook Stable) and its 20% equity interest in Heineken.

KEY RATING DRIVERS

Solid Business Portfolio

The ratings reflect the solid business portfolio of FEMSA in the beverage and retail sectors. In the non-alcoholic beverage sector, FEMSA has a 47.9% economic ownership and 63% voting shares of KOF, the largest franchised independent bottler of Coca-Cola products in the world in terms of sales volume. In addition, the company owns a 20% equity interest in Heineken, one of the largest beer producers in the world. In the retail sector, FEMSA's wholly owned subsidiary FEMSA Comercio is the largest chain of convenience stores in Latin America, under the brand name Oxxo.

Strong Retail Business

FEMSA Comercio continues to strengthen its business position in the retail sector through organic growth and acquisitions. Oxxo continues to open on average more than 1,200 stores per year, reaching 14,695 stores as of September 2016, and maintaining its position as the third largest retailer in Mexico in terms of sales. Its health (drugstores) and fuel (gas stations) divisions have also been increasing their contribution to FEMSA Comercio's figures and represent approximately 20% and 13%, respectively, of its total revenues. The company operates more than 1,000 pharmacies in Mexico and around 680 in Chile and 180 in Colombia, as well as 348 gas stations in its fuel business. Fitch anticipates FEMSA will continue expanding in these divisions through organic growth and acquisitions.

Good Operating Performance

Fitch expects FEMSA Comercio, the main source of cash flow generation for FEMSA at the holding company, to maintain a robust operating performance. Fitch projects FEMSA Comercio's consolidated revenues will increase around 39% in 2016 and 9% in 2017. The effect of acquisitions, opening new stores across its retail, health and fuel divisions, and mid-single-digit growth in same store sales (SSS) in Oxxo should support the expected increase. Fitch also expects a slight reduction in FEMSA Comercio's profitability because the drugstores and gas stations have lower margins than Oxxo. Fitch projects an EBITDA margin in FEMSA Comercio of around 8% to 9% in 2016-2017. For the first nine months of 2016, FEMSA Comercio's revenues increased 45% to MXN152.3 billion, while EBITDA margin decreased to 8% from 9% when compared to the same period of 2015.

Stable Leverage

Fitch believes that FEMSA's leverage, excluding KOF, will remain relatively stable. For 2016 Fitch projects FEMSA's total debt-to-EBITDA excluding KOF and total net debt-to-EBITDA to be around 2.4x and 0.7x, respectively, and then gradually decrease to 2x and 0.5x by year-end 2017. For the LTM as of Sept. 30, 2016, excluding KOF, FEMSA's total debt-to-EBITDA and total net debt-to-EBITDA as calculated by Fitch were 2.5x and 0.4x, respectively. Adjusting these ratios with the amount of rents coming mainly from FEMSA Comercio, Fitch calculated a total adjusted debt-to-EBITDA plus rents (EBITDAR) of 3.4x and total adjusted net debt-to-EBITDAR of 1.8x.

Manageable Debt Profile and FX Risk

As of Sept. 30, 2016, FEMSA's total debt, excluding KOF, estimated by Fitch was MXN44 billion, of which MXN2.5 billion corresponded to local issuances due in 2017, MXN12.7 billion of senior notes due in 2023 and 2043 (USD300 million and USD700 million, respectively), MXN21.6 billion (EUR1 billion) of senior notes due in 2023, and MXN6.7 billion of bank debt maturing between 2016 and 2022 related mainly to FEMSA Comercio. Fitch believes FEMSA's exposure to foreign currency debt is manageable, as the principal and interest payments of its USD senior notes were hedged to Mexican pesos, while the senior notes denominated in Euros have a natural hedge with the dividends from Heineken.

KEY ASSUMPTIONS

--Revenue growth, excluding KOF, of 38% in 2016 and 10% in 2017;

--EBITDA margin, excluding KOF, at around 8% to 9% in 2016-2017;

--Total debt-to-EBITDA and net debt-to-EBITDA, excluding KOF, below 2x and 0.5x, respectively, in the next 18 to 24 months.

--Total adjusted debt-to-EBITDAR and adjusted net debt-to-EBITDAR, excluding KOF, below 3x and 2x, respectively, in the next 18 to 24 months.

RATING SENSITIVITIES

Fitch does not foresee any positive rating action over the medium term.

Negative ratings actions could be triggered by the combination of one or more of the following:

--Deterioration of operating performance and profitability at FEMSA Comercio;

--Significant decline in the flow of dividends received from KOF and Heineken;

--Aggressive debt-financed acquisitions that change the capital structure of the company in the long term;

--Multiple downgrades in the sovereign ratings of Mexico could pressure the ratings.

LIQUIDITY

FEMSA's liquidity position, excluding KOF, is strong, with cash and marketable securities of MXN37.7 billion and short-term debt of MXN2.4 billion as of Sept. 30, 2016. Also, its liquidity position is supported by stable dividends received from KOF and Heineken of around MXN3.3 billion each in 2016. Fitch considers that the annual free cash flow (FCF) capacity of FEMSA Comercio estimated by Fitch at around MXN6 billion and the approximately EUR8 billion of market value in its 20% stake in Heineken as of December 2016 provide additional flexibility for its liquidity needs and to service its debt and amortization profile.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

--Long-Term Foreign Currency Issuer Default Rating (IDR) at 'A';

--Long-Term Local Currency IDR at 'A';

--National scale long-term rating at 'AAA(mex)';

--National scale short-term rating at 'F1+(mex)';

-- EUR1 billion senior notes due 2023 at 'A';

-- USD300 million senior notes due 2023 at 'A';

-- USD700 million senior notes due 2043 at 'A';

--Local Certificados Bursatiles issuances FEMSA 07U due in 2017 at 'AAA(mex)'.

Additional information is available at www.fitchratings.com

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016)

https://www.fitchratings.com/site/re/886557

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016265

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016265

Endorsement Policy

https://www.fitchratings.com/regulatory

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View source version on businesswire.com: http://www.businesswire.com/news/home/20161209005752/en/

Fitch Ratings
Primary Analyst
Rogelio Gonzalez
Director
+52-81-8399-9100
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst
Johnny Da Silva
Director
+1-212-612-0367
or
Committee Chairperson
Alberto Moreno
Senior Director
+52-81-8399-9100
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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