Fitch Affirms Atic's IDR at 'BB+'; Outlook Revised to Negative

Fitch Ratings has affirmed the 'BB+' foreign and local currency Issuer Default Ratings (IDRs) of Grupo Embotellador Atic S.A. (Atic) and revised the Outlook to Negative from Stable. In conjunction with this rating action, Fitch has affirmed the 'BB+' rating of Ajecorp B.V.'s (Ajecorp) USD450 million notes due in 2022. Ajecorp is a wholly owned subsidiary of Atic and is incorporated in the Netherlands as a limited liability company. Ajecorp's 2022 notes are unconditionally guaranteed by Atic and its key operating subsidiaries.

The Negative Outlook reflects increased loans to sister companies, while market conditions remain difficult in key markets such as Peru, Colombia, Mexico and Thailand. The loans have benefited a beverage company in Indonesia owned by Atic's shareholders. The ratings of Atic and Ajecorp will be downgraded within six months if this company is not brought into the guarantor group. Even if this were to occur, the ratings would likely remain with a Negative Outlook. Fitch remains concerned about the company's weak cash flow generation in crucial countries such as Peru, Colombia and Mexico. If Atic's performance in these markets does not recover within 12 to 18 months, negative rating actions will likely occur.

KEY RATING DRIVERS

High Leverage and Tight Liquidity

Fitch projects that Atic's year-end net leverage ratio will be 3.8x absent the incorporation of any sister companies. The company's challenging markets, along with its loans to related parties, have increased this figure from 3.1x in 2013 and 2.2x in 2012. Atic had USD534 million of consolidated debt as of June 30, 2014 versus USD75 million of cash and marketable securities. Only USD42 million of the company's debt is due in the short term. Atic also has undrawn liquidity facilities. Atic's cash has fallen from USD202 million in 2012. During 2013, the company spent USD90 million on capex and around USD75 million on loans to related parties.

Cash Flow Pressured

Fitch expects EBITDA to be around USD125 million for 2014. Atic's EBITDA has been pressured by strong competition in Thailand, the implementation of taxes on caloric beverages in Mexico in 2014, intense price competition between Pepsi and Coca-Cola in Colombia, and poor market conditions in Peru. The company continues to be cash flow negative in Brazil and is quickly decreasing the scope of its operations in that country. Atic's EBITDA during the LTM ended June 30, 2014 was USD122 million. This figure compares poorly with USD140 million in 2013 and USD150 million in 2012.

Limited Upside in Thailand

The company's presence in Thailand has decreased and cash flow from this market is not expected to rebound to historical levels. During 2012, Thailand represented around 15% of Atic's EBITDA. The company has decreased its production and distribution presence in this market following changes in market dynamics during 2012. Key competitors in this market are Coca-Cola, PepsiCo, Inc. (Pepsi) and Thai Beverage Plc. When Pepsi's bottling agreement with ThaiBev expired at the end of 2012, ThaiBev launched its own soft drink and quickly captured about 20% of Thailand's carbonated soft drink market. At the same time, Coca-Cola seized the opportunity to re-enter the market in the second half of 2013 and aggressively expanded its presence.

Geographic Diversification

Colombia represented 49% of Atic's consolidated EBITDA as of June 30, 2014. The company's next most important market was Peru (35%), followed by Central America (27%), Ecuador (10%), and Venezuela (10%). Historically its home market of Peru has been a non-cola market, which benefits B-brand producers as they rely heavily upon non-cola products. Central America and Ecuador have become drivers of sales growth. The level of geographic diversification mitigates to a degree the company's exposure to markets such as Venezuela, where economic and political uncertainty are high.

Market Position in 'B' Brand Segment

Atic has a relatively small presence in each country with market shares typically below 20% and faces strong competition from Coca-Cola and Pepsi in each market. Atic prices its products approximately 30% to 40% lower than Coca-Cola's products and competes directly against other producers of non-branded products in the 'B' brand segment of the market. The company's target customers are price sensitive consumers in the lower economic classes. Nearly 90% of its consolidated sales occur at mom-and-pop stores. Its key brands are 'Big Cola' and 'Kola Real'.

Family Ownership

Substantial loans to related companies are permitted under the bond indenture but remain credit concerns. Atic's controlling shareholders, the Ananos family, own other beverage companies, such as Callpa Limited and Kinlest Investments, which produce and sell Aje-brand beverages. Many of these companies are domiciled in Asia. The family also directly owns the formulas for the beverages produced by the company, which results in the transfer of some operating profits to the shareholders in the form of royalty payments.

RATING SENSITIVITIES

A positive rating action is not likely to occur in 2014 or 2015.

A negative rating action would occur if Atic fails to incorporate the operations of a substantial sister company into the guarantee structure. The Negative Outlook will most likely continue to remain even if the company adds additional guarantors. If the company's operations do not improve in other markets and leverage remains above 3x, a rating downgrade will likely occur.

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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=913615

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