OREANDA-NEWS. Fitch Ratings has affirmed the ratings of FEMSA, S.A.B. de C.V. (FEMSA) as follow:

--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)';
--Senior notes for USD300 million due 2023 at 'A';
--Senior notes for USD700 million due 2043 at 'A';
--Local Certificados Bursatiles Issuances FEMSA 07U due in 2017 at 'AAA(mex)'.

The Rating Outlook is Stable.

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 level with low 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 rights of KOF which is 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 strengthen its business position in the retail sector through organic growth and acquisitions. The company is the third largest retailer in Mexico in terms of sales and has the leading position in the convenience store segment. Oxxo has 13,541 stores as of Sept. 30, 2015 and opens on average more than 1,100 stores per year in the past two years with internally generated cash flow. Fitch also considers as positive to FEMSA Comercio's business position the recent acquisition of a 60% equity stake in Socofar as is aligned with its growth strategy in the pharmacy category, and it will provide geographical and product diversification from Chile and Colombia in this business segment. In Mexico, the company operates 883 pharmacies

Positive Retail Performance
FEMSA Comercio, the main source of cash flow generation for FEMSA at the holding level, maintains a positive growth trend in revenues and EBITDA despite weak economic conditions in Mexico during the first half of 2015. Fitch projects that FEMSA Comercio's revenues will increase around 35% in 2015, and 30% in 2016, as a result of the acquisition of Socofar, opening of new stores and mid-single digit growth in same store sales (SSS). In terms of profitability, Fitch expects a slight contraction in EBITDA margins in FEMSA Comercio to around 9% in 2015 and 2016, as a result of the consolidation of lower margins operations from Socofar and gas stations. For the last 12 months (LTM) as of Sept. 30, 2015, FEMSA Comercio's revenues increased 25% to MXN133.7 billion, while EBITDA margin decreased to 10% from 11% when compared to the same period of 2014.

Stable Leverage
Fitch's expectation incorporates that FEMSA's leverage, excluding KOF, will remain relatively stable. Fitch projects for the next 18 to 24 months, that FEMSA's total debt to EBITDA will be close to 1.2x and its total net debt to EBITDA will be around 0.5x. The recent acquisition of Socofar did not have a material impact in the company's credit quality as it was financed with available cash position. As part of this transaction FEMSA consolidated around USD281 million of debt from Socofar. Fitch anticipates that FEMSA will continue evaluating investments or acquisitions to strengthen its business portfolio without changing significantly its capital structure in the long term.

For the LTM as of Sept. 30, 2015, on pro forma basis, including annual results of Socofar and excluding KOF, FEMSA's total debt to EBITDA and total net debt to EBITDA calculated by Fitch were 1.6x 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) and total adjusted net debt to EBITDAR, of 2.7x and 1.8x, respectively. These ratios would have been 2.2x and 1.4x, respectively, adding in the dividends of KOF and Heineken to EBITDAR.

Manageable Debt Profile and FX Risk
As of Sept. 30, 2015, FEMSA's total debt at the holding level was MXN32.3 billion of which MXN3.5 billion corresponded to local issuances due in 2017, USD300 million to senior notes due in 2023, USD700 million of senior notes due in 2043, and around MXN12 billion of bank debt maturing between 2014 and 2022 related to Socofar, FEMSA Logistica and Imbera. FEMSA Comercio's balance sheet as of Sept. 30, 2015 was debt free. Fitch views that FEMSA's exposure to its dollar denominated debt is manageable as the principal and interest payments of its senior notes were hedged into MXN.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for FEMSA include:
--Revenue growth excluding KOF of 36% in 2015 and 30% in 2016,
--EBITDA margin, excluding KOF at around 9% in 2015-2016;
--Total debt to EBITDA and net debt to EBITDA, excluding KOF, close to 1.2x and 0.5x, respectively, in the next 18 to 24 months;
--Total adjusted debt to EBITDAR and adjusted net debt to EBITDAR, excluding KOF, close to 2.5x and 2.0x, 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 of its business portfolio;
--Significant decline in the flow of dividends received by KOF and Heineken;
--Aggressive debt-financed acquisitions that change the capital structure of the company in the long term.

LIQUIDITY

Strong Liquidity
FEMSA's cash and marketable securities, excluding KOF, was MXN26 billion as of Sept. 30, 2015, and had short-term debt of MXN8.1 billion. Approximately, MXN7.2 billion of its cash position was used in October 2015 to pay short-term debt related to the acquisition of Socofar. Fitch considers that the company's liquidity position is maintained by the sound annual free cash flow generation (FCF) of FEMSA Comercio of over MXN5 billion and stable dividends payments from KOF and Heineken. These companies paid in 2015 to FEMSA MXN3 billion and MXN2.4 billion, respectively, while FEMSA paid to its shareholder MXN7.4 billion. FEMSA liquidity requirements could additionally be supported by the market value of around EUR9 billion of its 20% stake in Heineken.