Fitch Ratings has affirmed Coca-Cola Icecek's (CCI) Long-Term Foreign- (FC) and Local-Currency (LC) Issuer Default Ratings (IDRs) and senior unsecured long-term rating at 'BBB-'.
The Rating Outlook remains Positive.
The Positive Outlook reflects our expectation that the company's financial profile will remain resilient, with consistently strong operating profitability counterbalancing a weak operating environment in a number of CCI's markets of operations. Inherent foreign-exchange (FX) risks related to hard-currency- denominated debt and part of operating costs remain the key rating constraints.
The ratings continue to be supported by CCI's leading positions in its core markets, the resilient nature of the soft drinks business and CCI's strong capital structure.
CCI's ratings continue to benefit from a single-notch uplift for strategic support from parent,
Key Rating Drivers
High but Manageable FX Risks: As of
Limited Impact from Ukrainian Conflict: Although we expect the war in
Inflationary Challenges to Operating Profitability: We forecast higher material and logistics costs to affect CCI's cost structure over the next 12-18 months. We believe that improving or even maintaining the favourable product mix in a potentially stagflation environment can be difficult. Proactive procurement and hedging should help reduce the impact on operating profitability in 2022. Overall profits for 2022 will also benefit from the effect of full year consolidation of
Strong Cash Flow Generation: Resilient operating profitability and capex forecast at 6%-8% of revenue in 2022-2025 should allow CCI to generate free cash flow (FCF) margins in mid-to-high single digits. We also continue to assume that CCI will adhere to its maximum dividend pay-out of 50% of net distributable income and to favour cash accumulation and deleveraging, with the aim of building up financial flexibility to maintain a low-risk balance sheet. This flexibility may also be deployed for potential M&A to grow the business in new geographies.
Weak Operating Environment: The operating environment in CCI's core markets (
Conservative Capital Structure Intact: CCI's conservative financial policy targets net debt at below 2x EBITDA (2021: 1.5x), albeit with tolerance for a temporary breach for value-enhancing M&A opportunities. Even with this conservative target CCI acquired Coca-Cola Bottlers Uzbekistan with ample leverage headroom and hence without a breach of rating sensitivities. We project leverage ratios to remain well below target over the coming years, supported by sufficient FCF generation and cash reserves to cover upcoming debt maturities.
One-Notch Uplift for TCCC Support: Fitch applies a 'bottom-up plus one notch' approach to CCI's Standalone Credit Profile (SCP) of 'bb+', reflecting our assessment of TCCC's 'Medium' operational and strategic incentives for supporting CCI. This is based on shared brands and marketing functions, as well as strategic, operational and innovation support provided by TCCC. We assess legal incentives as 'Weak'. Overall, TCCC's moderate ownership of CCI at 20% constrains the uplift to a single notch. In our view this level of ownership creates some uncertainty at the current rating about the extent of potential support to CCI in case of need, given also the existence of a majority shareholder, Anadolu Efes Biracilik ve Malt Sanayii A.S. (AEFES, BB+/RWN), and the company's public listing.
Insulated Ring-Fencing from AEFES: Under its Parent-Subsidiary Linkage methodology, Fitch views CCI's credit profile as insulated from that of its weaker parent, AEFES, which holds 50.3% of CCI's shares. This is because AEFES's ability to control CCI is constrained by important voting rights of the other shareholder, TCCC. Moreover, CCI's and AEFES's treasury functions and debt structures are fully ring-fenced from each other.
Kazakhstan Country Ceiling: We apply
Fitch assesses transfer and convertibility risks for
Derivation Summary
CCI is among the 10-largest bottlers in the TCCC system in sales volumes, and one of the highest-rated corporates in
CCI's ratings benefit from a one-notch uplift for potential support from TCCC. This is in line with Fitch's approach to CCEP, whose ratings also benefit from our assessment of TCCC's 'Medium' operational and strategic incentives for supporting CCEP.
At the same time, CCI's SCP reflects moderate pressure from a weak operating environment in the markets in which it operates.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Turkish lira/US dollar on average at 14.5 in 2022, weakening to 20.5 in 2023 and 21.5 in 2024 and 22 in 2025
Turkish sales volumes growing in low single digits in 2022-2025. Given heightened inflationary pressure we assume around 60% growth at the average selling price in 2022, reducing to around 50% in 2023
International sales volumes growing at high teens in 2022, including the acquisition of bottling operations in
Consolidated EBITDA margin reducing to around 19.2% in 2022 on negative FX impact and commodity pressures on profitability in
Capex at around 8% of net sales in 2022, gradually decreasing to 7% in 2023, 6.5% in 2024 and 2025
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to an upgrade:
As we do not expect changes in the strength of ties with TCCC, an upgrade would depend on CCI's SCP, based on the following factors:
EBITDA margin sustained above 20% (2021: 20.5%) translating into mid-single-digit FCF margins
Enhanced geographic diversity, either organically or through M&A, without impairing the operating- environment score (currently bb-)
Conservative financial structure with funds from operations (FFO) net leverage remaining sustainably below 2.0x (2021: 1.7x) or net debt/EBITDA below 1.7x (2021:1.5x)
Factors that could, individually or collectively, lead to a revision of the Outlook to Stable
Decline in EBITDA margin to below 18% on a sustained basis, translating into low single-digit FCF margins
FFO net leverage sustainably above 2.0x or net debt/EBITDA above 1.7x
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Adverse impact of weaker operating and macro environments in CCI's core markets on credit metrics not accompanied by adequate cash-preservation measures, such as dividend-and-capex reduction
Increased volatility of FCF (after capex and dividends)
FFO net leverage above 3.0x, or net debt/EBITDA above 2.7x
FFO interest coverage below 5x (2021: 7.7x) or EBITDA/interest paid below 6.5x (2021: 8.8x)
EBITDA margin below 14%
Weakening linkages with TCCC
A downgrade of the Country Ceiling of
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 '
Liquidity and Debt Structure
Strong Liquidity: At
Liquidity is also supported by
Summary of Financial Adjustments
N/A
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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONS
Entity / Debt
Rating
Prior
Coca-Cola Icecek
LT IDR
BBB-
Affirmed
BBB-
LC LT IDR
BBB-
Affirmed
BBB-
senior unsecured
LT
BBB-
Affirmed
BBB-
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