Fitch Ratings – Monterrey – 17 Jun 2020: Fitch Ratings has affirmed Bepensa S.A. de C.V.’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BBB’. In addition, Fitch has affirmed Bepensa’s Long-Term National scale rating at ‘AAA(mex)’. The Rating Outlook is Stable.
The rating affirmation reflects the expected negative impact on Bepensa’s operating performance due to the coronavirus disruptions and the lower level of economic activity projected for Mexico in 2020. In addition, the ratings incorporate the increase in the company’s leverage metrics following the acquisition of ABC Leasing S.A.P.I. de C.V. (ABC Leasing), which will change its consolidated capital structure over the rating horizon as financial services businesses require higher levels of total debt to operate.
Fitch’s base case projection for 2020 forecasts that Bepensa’s revenues will decline around 9% in 2020, while EBITDA margin will decline to approximately 15% from 16% in 2019. A gradual recovery in its operating performance is expected in 2021 assuming that measures of social distant and mobility restrictions are lifted and the level of economic activity returns. Revenue growth and EBITDA margin in 2021 is expected at approximately at 9% and 16%, respectively.
Bepensa’s leverage metrics are expected to change over the rating horizon after increasing the scale of its financial services businesses. Its consolidated gross and net leverage metrics are projected at 4.7x and 3.2x, respectively, at YE2020. These metrics will be close to 3.4x and 2.8x by YE 2021 and will be below the negative rating sensitivities revised by Fitch. Bepensa’s financial businesses maintain a good operating performance in its niche market with an adequate size of their credit portfolio, manageable rate of impaired loans and no requirements of capital injections in the next 12 to 18 months.
Bepensa’s ratings reflect the solid business position of its main subsidiary, Bepensa Bebidas, S.A. de C.V., a bottler of The Coca-Cola Company’s (A/Stable) products in the territories of the Yucatan Peninsula, Mexico (BBB-/Stable) and Dominican Republic (BB-/Stable). The ratings also incorporate the company’s business portfolio, which includes presence in the industrial and financial services markets, and in the ready-to-drink alcoholic industry through its brand Caribe Cooler. Bepensa’s ratings are limited by the credit risk associated with its financial services operation, which is a riskier business than the company’s core business of beverages.
KEY RATING DRIVERS
Coronavirus Impact Manageable: Bepensa’s operations are expected to have a moderate impact due to the disruptions related to the coronavirus pandemic. Bepensa Bebidas, its largest subsidiary, is facing some challenges as the demand of its carbonated soft drinks products exposed to hotels, restaurants and foodservice in the Peninsula of Yucatan and Dominican Republic, has been weak due to the lockdown of activities in that region. In contrast, the demand of water, which is close to 50% of its total volume, has been moderate growing and has compensated some of the decline in other categories of its total product portfolio. The operations in its Industrial division, which are driven mainly by the packaging and chemical business, should have moderate declines in their performance. Bepensa’s implemented several initiatives related to safeguard of employees, strict control of costs and expenses, capex rationalization and support liquidity to overcome the operational and financial risks in the following quarters.
Weaker Operating Results in 2020: Fitch expects Bepensa’s consolidated performance to be affected in 2020 due to the coronavirus pandemic and economic recession, but projects a gradual recovery by 2021. Fitch’s base case projections incorporate a decline in revenues of 9% for 2020 and an increase of around 9% in 2021. The decline in revenues in 2020 will be mainly driven by a weaker performance in Bepensa Bebidas as lower sales volume are projected across its different distribution channels being the hotels, restaurants and foodservice the most affected. Overall sales volume decline is projected around 10%. In addition, some of the revenues reduction coming from Caribe Cooler and Bepensa Industrial businesses will be partially compensated by higher revenues coming from the consolidation ABC Leasing. Revenue increased in 2021 will be mainly supported by the normalization of economic activity. In 2019, Bepensa revenues increased 7% compared with 2018.
Bepensa’s consolidated EBITDA calculated by Fitch is forecasted to decline 14% in 2020 and to increase 14% in 2021. The reduction in EBITDA is projected to be related by a lower absorption of fixed costs across its different businesses due to lower production and sales volume and by a change in the sales mix of its beverage division as the consumer is demanding larger volume presentations, which have less profitability than personal products. In terms of profitability, EBITDA margin is expected to decline to around 15% in 2020 and then recovery to 16% in 2021. Bepensa’s EBITDA margin in 2019 was 16% and represented an improvement when compared with 14% in 2018.
Higher Leverage Due to Acquisitions: Fitch incorporates in the ratings that Bepensa’s financial position on a consolidated basis will have higher than historical leverage metrics as the company increased the operations of its financial services with the acquisition of ABC Leasing. While this transaction resulted in a significant increase of total debt for Bepensa after consolidating close to MXN3 billion of ABC Leasing’s total debt, it has also come with a credit portfolio of around MXN4.1 billion that will mitigate the risks. Fitch’s revised approach for Bepensa considers that its proforma net leverage metrics, excluding the operations of its financial subsidiaries, Financiera Bepensa S.A. de C.V. SOFOM, ER. (FinBe; AAA[mex]) and ABC Leasing, should remain at or below 1.5x to maintain its current ‘BBB’ rating combined with a consolidated net leverage of 3.5x.
Fitch projects gross and net leverage of Bepensa will be around 4.7x and 3.2x, respectively, by YE 2020, and will gradually decline to 3.4x and 2.8x, respectively, by YE 2021. Fitch’s base case forecast assumes that Bepensa’s total debt will be around MXN11.9 billion by YE 2020. The increase in total debt when compared with MXN5.9 billion at YE 2019 is mainly related to the acquisition of ABC Leasing and approximately MXN2.5 billion of additional debt to support its liquidity position during 2020. This latter amount is kept in its cash balance and could be prepaid if it is not required. Total debt/EBITDA, as calculated by Fitch, for the LTM ended March 31, 2020, was 2.9x, while net debt/EBITDA was 1.8x. These metrics compare with 2.0x and 1.5x at YE 2019.
Positive FCF: Bepensa’s FCF generation was positive across the business cycle and Fitch expects it will maintain this trend in the next two years. Fitch forecasts that the company’s cash flow from operations (CFFO) will be at levels between MXN1.3 billion in 2020 and 2021, which should be sufficient to face annual capex requirements of close to MXN600 million and MXN1.1 billion, respectively. In addition, Fitch’s projects dividends of approximately MXN275 million in 2020 and MXN390 million in 2021. Bepensa revised downward its planned capex and dividends for 2020 as a result of the disruptions associated to the coronavirus pandemic. In 2019 Fitch calculated that Bepensa’s FCF was positive MXN755 million driven by higher EBITDA generation when compared with 2018.
Strong Beverage Business: Bepensa Bebidas has a long and successful track record as a bottler of Coca-Cola’s products with a leading market share, as operations contribute around 81% of total revenue and 64% of EBTIDA. A well-diversified portfolio of leading brands and an extensive beverage distribution system maintained strong market share, despite the highly competitive nature of the beverage industry. The company is executing strategies to improve its business position by expanding coverage of coolers and vending machines, and implementing market intelligence initiatives at the point of sale to improve execution. Fitch believes these factors will contribute to Bepensa maintaining a leading business position in the long term.
Financial Business Limits Ratings: Fitch believes Bepensa’s subsidiaries, FinBe and ABC Leasing, have a higher risk profile than the core business in beverages. The growth of FinBe and ABC Leasing credit portfolio demands higher working capital and could pressure FCF generation in a negative macroeconomic environment in Mexico. FinBe and ABC Leasing are currently well capitalized and do not require capital injections from Bepensa in the next 12-18 months. Around 53% of Bepensa’s total debt is expected to be associated with its financial businesses at YE 2020.
DERIVATION SUMMARY
Bepensa’s ratings reflect the solid business position of its beverage business with a stable financial position with low leverage ratios and adequate liquidity through the business cycle. Bepensa’s business profile is comparable with other Coca-Cola bottlers in the region, such as Arca Continental, S.A.B. de C.V. (A/Stable), Coca-Cola FEMSA, S.A.B. de C.V. (KOF; A-/Stable), and Embotelladora Andina S.A. (Andina; BBB+/Stable). Bepensa’s rating is lower than peers, given its smaller size and scale, geographic diversification and sales mix of its beverage business, which is more concentrated in jug water. The company’s business profile reflects the credit risk associated with its financial services operation, which is a riskier business than its core business. EBITDA margin is expected to be at approximately 15%, which is lower than industry peers Arca, KOF and Andina, which are projected within 17% to 19%. Bepensa’s projected net leverage of close to 3.0x is higher than Arca, KOF and Andina, which are at levels below 2.0x.
KEY ASSUMPTIONS
Fitch’s Key Assumptions Within the Rating Case for the Issuer Include
–Revenue decline of approximately 9% in 2020 and growth of 9% in 2021;
–EBITDA margin at around 15% in 2020 and 16% in 2021;
–Capex around MXN600 million in 2020 and MXN1 billion in 2021;
–Total debt/EBITDA and net debt/EBITDA close to 3.4x and 2.8x, respectively, by 2021.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating actions are not possible in the national scale, however, in the international scale the following factors could lead to positive rating actions:
–Bepensa’s total debt/EBITDA declines to levels consistently below 2.0x, as a result of an improvement in operating results and the credit profile of its beverage businesses;
–Debt reduction above Fitch expectations;
–Positive FCF generation and FinBe’s and ABC Leasing financial profile remains solid without requiring frequent support from Bepensa.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–Deterioration of operating performance and the credit profile in the beverage businesses;
–Higher working capital requirements due to uncollectible accounts at FinBe and ABC Leasing;
–Requirements of capital injections from Bepensa to FinBe and ABC Leasing due to a deterioration in their financial positions;
–Aggressive capital distributions to shareholders of Bepensa that result in significant negative FCF;
–Debt-financed acquisition leading to total net debt/EBITDA above 1.5x, excluding the financial operation of FinBe and ABC Leasing, or total net debt/EBITDA above 3.5x on a consolidated basis.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: As of March 31, 2020, Fitch believes Bepensa has flexibility to face short-term debt amortizations of MXN7 billion with its cash balances and short-term investments of MXN3.2 billion, good access to bank loans and capital markets. In addition, for the LTM as of March 31, 2020, the company generated CFFO of MXN3.6 billion. The short term debt is mainly allocated in Bepensa Bebidas and FinBe, and the company is in process to refinance the local issuances of MXN2 billion that are due in October 2020.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Bepensa has an ESG Relevance Score of 4 for Group Structure as the company presents above average complexity of its corporate structure and related party transactions compared with other rated peers.
Bepensa has an ESG Relevance Score of 4 for Financial Transparency given that the company presents a below average periodical financial disclosure about operations and business segments compared with other rated peers.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3 – ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.
Source: https://www.fitchratings.com/
