Fitch Affirms Coca-Cola Icecek's Long-Term Foreign-Currency IDR at 'BB'; Outlook Negative

Coca-Cola Icecek AS

25/09/2019 17:47

(The following statement was released by the rating agency)


Fitch Ratings-Moscow-September 25: 

Fitch Ratings has affirmed Coca-Cola Icecek's (CCI) Long-Term Foreign-Currency 
(FC) Issuer Default Rating (IDR) and senior unsecured long-term rating at 'BB'. 
The Outlook on the IDR is Negative.The FC IDR is constrained by Turkey's Country 
Ceiling of 'BB-'. The affirmation of the Long-Term Local-Currency (LC) IDR at 
'BBB-' reflects Fitch's expectations that CCI's credit profile remains strong 
due to its leading positions in its core markets, resilient nature of the soft 
drinks business and strong financial profile. The Negative Outlook on the LC IDR 
continues to capture potential risks related to the weakened operating 
environment in some of CCI's overseas markets in addition to Turkey, which could 
pressure the group's operating performance in the near term.

Key Rating Drivers

FC IDR Above Country Ceiling: CCI's FC IDR benefits from a single-notch uplift 
to 'BB', above Turkey's 'BB-' Country Ceiling, reflecting scope for support by 
The Coca-Cola Company (TCCC) for transfer and convertibility risks. Based on 
Fitch's "Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria" 
the growing share of cash flows generated by CCI outside Turkey, and from 
Kazakhstan in particular (2018: 12% of group revenue), which has a higher 
Country Ceiling of 'BBB+', could support a shift of the Country Ceiling that is 
applied to CCI away from Turkey. Should CCI generate sufficient EBITDA from 
Kazakhstan to sustainably cover its consolidated hard currency gross interest 
expenses over three to five years, we could consider changing the applicable 
Country Ceiling.Parent-Subsidiary Linkage with TCCC: CCI has a strong 
operational and strategic relationship with TCCC, which owns 20.1% of CCI and 
exercises considerable influence over its major decisions. TCCC licenses strong 
global brands to CCI, provides marketing expertise and has price flexibility in 
its supply terms that can partly protect profits from currency fluctuations. 
Despite the absence of strong legal ties such as formal guarantees from TCCC or 
cross defaults, we believe that CCI could still rely on TCCC through other forms 
of financial support in case of need.In applying our "Parent-Subsidiary Linkage" 
methodology we have followed the "strong parent/weak subsidiary" path and 
assessed the overall linkage strength as overall moderate. This results in a 
bottom-up approach and a one-notch uplift applied by Fitch to CCI's 'BB+' 
standalone Local-Currency rating.High, Still Manageable FX Risks: Almost all of 
CCI's debt (2018: above 90%) as well as the prices for a relevant proportion of 
raw materials (approximately 35%) are denominated in US dollars and euros. 
However, all of CCI's operations are based in emerging markets, with Turkey, 
Pakistan, Kazakhstan and Iraq contributing nearly 90% of revenue in 2018. The 
resulting high FX risks are partly balanced by growing diversification of 
profits and reducing dependence on a sole country (Turkey). Fitch projects that 
Turkey's share in CCI's EBITDA (before central costs) will fall to around 40% by 
end-2020 (2018: 44%). Another mitigating factor is CCI's conservative cash 
management, including a strategy to keep 75%-80% of cash in hard currency (2018: 
60%).Debt Service Hedging in Place: Fitch also expects the impact from 
depreciation of Turkish lira against the US dollar during 2019 (around -8% to 
date) on profits and interest costs will be partly mitigated by a hedging 
contract that CCI entered into in 2018. A seven-year swap contract allows CCI to 
pay its US dollar-denominated interest rate charges on the 2024 bond at a rate 
of 3.8. At maturity in 2024, it also hedges up to USD150 million of principal at 
the same US dollar/Turkish lira exchange rates should the market exchange rate 
be within the 3.8-8.5 range and maintain some degree of hedging should the 
Turkish lira depreciate further.Demonstrated Resilience in Core Market: CCI's 
operations remain resilient in its core Turkey market, with volumes still 
growing in 2018 and only mild contraction in 1H19 (+4.2% volume growth excluding 
Non-Alcohol Ready-To-Drink tea segment) amid a challenging operating environment 
with high inflation rates and Turkish lira depreciation. With Turkish consumer 
sentiment expected to be muted, we project a slight decline in CCI's sales 
volumes in 2019 with only modest recovery in 2020. This is likely to be offset 
by CCI's ability for further price increases and work on improving mix, both 
supported by increased marketing spending and growing share of immediate 
consumption packages. We project average price growth in the high teens in 2019 
and above expected inflation rates in 2020-21. Together with continued focus on 
cost efficiencies, this is likely to allow CCI to protect its profitability and 
compensate the impact of higher input costs linked to currency headwinds. 
Overall, we assume 150bp EBITDA margin expansion in 2019 
(1H19:+430bp).Challenges in Major Overseas Markets: A difficult operating 
environment in Pakistan in 1H19, CCI's second-largest market (2018: 23% of 
revenue), together with an economic slowdown in Jordan and convertibility 
problems in Turkmenistan are likely to become a drag on CCI's international 
operations performance in 2019, which was very strong in 2018 (up 7.8% volumes 
yoy). These pressures are likely to be partially offset by continued strong 
growth in Kazakhstan (2018: 12% of revenue), which delivered double-digit volume 
growth in 1H19. Weaker revenue growth in Pakistan as well as production stoppage 
in Turkmenistan led to a drop in profitability in the international segment in 
1H19 and we conservatively assume 200 bp EBITDA margin contraction for full 
2019.Healthy Cash Flow Generation: Fitch projects positive free cash flow (FCF) 
post dividend at around 3% of revenues annually over 2019-21. Assuming a 
resilience of CCI's fund from operations (FFO) margin at around 14% over 2019-21 
(2018: 14.3%), we estimate CCI will generate sufficient cash flow to service its 
hard currency debt and maintain a dividends pay-out ratio at 50% over the next 
four years. We do not rule out potential interest to expand to new markets over 
the next three to five years, but our projections do not assume any major MA 
activity.Comfortable Leverage: We expect FFO adjusted net leverage to reduce 
toward 2.0x by end-2019 (2018: 2.3x). Nearly half of CCI's debt is represented 
by a USD500 million Eurobond maturing in 2024, resulting in manageable 
refinancing risk in 2019-23. The next largest maturity of USD80 million United 
States Private Placement (USPP) is in 2020 which we estimate could be largely 
covered by FCF. Under our rating case US dollar/Turkish lira assumptions, we 
expect CCI to continue deleveraging toward 1.5x FFO adjusted net leverage by 
2021. We believe that management's target to maintain net debt/EBITDA below 2.0x 
is achievable in the medium term.

Derivation Summary

CCI is the sixth-largest bottler in the Coca-Cola system in terms of sales 
volume and the highest rated corporate in Turkey. Compared with the main peers 
Coca-Cola Femsa (A-/Stable) and Coca-Cola Amatil (BBB/Stable), CCI is smaller in 
size, has a lower EBITDA margin and operates in markets that require more capex 
and are vulnerable to volatile demand. On the other hand, with FFO adjusted net 
leverage at 2.3x CCI is well-positioned at its 'BBB-' Local-Currency rating 
(which includes a one-notch uplift based on Fitch's parent-subsidiary linkages 
methodology) and in comparison with other Coca-Cola bottlers.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer-Turkish lira/US 
dollar average exchange rate of 5.98 in 2019, weakening to 6.81 in 2020 and 7.13 
in 2021-Turkish volume slightly declining in 2019 before growing at low single 
digits with average selling price rising 10%-18% over 2019-2020;-International 
volume growing by low single digits over the next four years, reflecting 
challenging market conditions in Pakistan and Iraq. Organic price/mix growth 
assumed at 1% annually;-Consolidated EBITDA margin averaging at 16.8% over 
2019-2022 (2018:17.1%);-Capex at 7.5% of net sales;-No major MA spending.- 
Continuous dividend growth

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating 
Action For the Long-Term Local-Currency IDR:-Improvement of the macroeconomic 
and operating environment in Turkey (including being reflected in a revision of 
the Outlook on the country's FC IDR to Stable) and in CCI's other core markets 
of CCI, subject to satisfactory operating performance and FFO adjusted net 
leverage remaining below 3x (2018: 2.3x).For the Long-Term FC IDR:-A revision of 
the Outlook on Turkey's IDR to Stable from Negative.-A change in the applicable 
Country Ceiling to Kazakhstan from Turkey.Developments That May, Individually or 
Collectively, Lead to Negative Rating ActionFor the LC IDR:-Adverse impact of 
deteriorated operating and macro environment in Turkey or/and in other core 
markets on the company's credit metrics not accompanied by adequate cash 
preservation measures, such as dividend and capex reduction.-Increased 
volatility of FCF (after capex and dividends).-FFO adjusted net leverage above 
3.0x, along with FFO fixed-charge coverage being below 4x (2018: 4.1x).-A 
weakening of CCI's strategic or operational ties with TCCC.-EBITDA margin 
falling below 14%.For the FC IDR:-A downgrade of CCI's LC IDR to 'BB-' or 
below.-A downward revision of the Country Ceiling for Turkey, would lead to a 
corresponding downgrade of CCI's FC IDR;-A reduction of the perceived likelihood 
of support by TCCC to CCI in case of transfer and convertibility risks would 
lead to the removal of the one-notch uplift from Turkey's Country Ceiling that 
we currently apply to CCI's FC IDR.

Liquidity and Debt Structure

Strong Liquidity: As of 30 June 2019 liquidity was supported by unrestricted 
cash (as defined by Fitch) of TRY2,006 million, approximately USD 1.7 billion in 
undrawn uncommitted (as typical in Turkey) bank lines, as well as strong 
relationship with both local and international banks. The next upcoming major 
maturity is represented by the USPP of USD80 million due in 2020.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3. ESG issues are credit-neutral or have only a minimal 
credit impact on the entity, either due to their nature or to the way in which 
they are being managed by the entity.For more information on our ESG Relevance 
Scores, visit www.fitchratings.com/esg.

Coca-Cola Icecek; Long Term Issuer Default Rating; Affirmed; BB; RO:Neg

; Local Currency Long Term Issuer Default Rating; Affirmed; BBB-; RO:Neg

----senior unsecured; Long Term Rating; Affirmed; BB

Contacts: 

Primary Rating Analyst

Tatiana Bobrovskaya, CFA

Director

+7 495 956 5569

Fitch Ratings CIS Ltd

Business Centre Light House, 6th Floor 26 Valovaya St.

Moscow 115054

Secondary Rating Analyst

Marialuisa Macchia, 

Associate Director

+39 02 879087 213

Committee Chairperson

Giulio Lombardi, 

Senior Director

+39 02 879087 214

 

Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: 
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Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Non-Financial Corporates Exceeding the Country Ceiling Criteria (pub. 17 Jan 
2019)

https://www.fitchratings.com/site/re/10059284

Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018)

https://www.fitchratings.com/site/re/10036366

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