OREANDA-NEWS. Fitch Ratings has downgraded the ratings for Embotelladora Andina S.A. (Andina) as well as its senior unsecured notes to 'BBB+' from 'A-'. Fitch has also affirmed the company's national-scale ratings. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

Given Andina's increased exposure to Brazil, Fitch's rating action follows the recent downgrade of Brazil to 'BB+' Rating Outlook Negative from 'BBB-' Rating Outlook Negative. Andina's ratings of 'BBB+' continue to reflect the company's solid operating profile backed by strong brand recognition, diversified operations, as well as the relatively stable dynamics of the beverage industry. These factors have enabled Andina to maintain its strong performance and cash flow generation despite the weak macroeconomic environment in the region which has allowed the company to reduce leverage quickly. Negatively, the ratings are tempered by its increased exposure to Brazil where the macroeconomic factors remain weak, and the volatility of prices of its main raw materials such as sugar and oil.

KEY RATING DRIVERS

INCREASED EXPOSURE TO BRAZIL

Andina's exposure to Brazil has increased partly due to its recent acquisition of Ipiranga. The Brazilian operation accounted for 36% of its consolidated sales volumes, 30% of revenues and EBITDA as of June 30, 2015. The company is the third largest bottler of Coca-Cola products in Brazil in terms of volume. Given its increased exposure to Brazil, further negative rating actions on Brazil's rating could place additional pressure on the company's ratings.

STRONG BUSINESS POSITION & GEOGRAPHICAL DIVERSIFICATION

Andina has solidified its operations in Argentina, Brazil, Chile and Paraguay through acquisitions of Embotelladoras Coca-Cola Polar (Kopolar) and Companhia de Bebidas Ipiranga (Ipiranga). The company is the third largest Coca-Cola bottler in Latin America in terms of volume and the seventh largest Coca-Cola bottler worldwide. Andina's business is also well diversified across Latin America. Brazil and Argentina are the largest contributors, with sales and EBITDA proportions at 30% each as of June 30, 2015, followed by Chile (27% of sales, 29% of EBITDA), and Paraguay (7% of sales, 10% of EBITDA).

STABLE PERFORMANCE

The company's consolidated volumes have decreased by 1% as of the June 30, LTM compared to 2014, reaching 826 million unit cases (UC). Volumes in most markets have reported low- to mid-single digit growth during the first three quarters of 2015; Brazil's reported volumes have declined each quarter when compared to the same period last year. Andina's EBITDA improved to CHP317,623 million in the LTM ended June 30, 2015, a 10% increase over 2014 due to improvements in efficiencies and operations which has offset cost pressures from higher distribution expenses in Brazil and Chile, increased labor costs, and depreciation of regional currencies relative to the U.S. Dollar.

NATIONAL SCALE RATINGS

Andina's national scale ratings have been affirmed at current levels as they are on an independent scale and do not move notch for notch with those on the international scale.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Andina include the following:

Revenue growth between 8%-10% from 2015-2018,
EBITDA margin close to 16%, Capex of around USD190 million and USD220 million in 2015 and 2016, respectively, in accordance with company guidance. Capex drops to 4.5% of revenues in 2017 and 2018 to cover maintenance; dividends of USD90 million in 2015 and 2016, increasing to up to 60% of net income beginning in 2017.

RATING SENSITIVITIES

A negative rating action could occur if Fitch believes that net leverage will remain above 1.5x during the next 18 to 24 months. Also, further deterioration of Brazil's macro environment and ratings that results in a downgrade of its country ceiling could lead to a further negative rating action. While Andina's rating does not explicitly factor in support from The Coca-Cola Company, a decrease of Coke's participation in the ownership structure would be viewed negatively.

A positive rating action is not likely in the near to medium-term. A return to historical net leverage levels for a continued period of time and a conservative financial strategy would be viewed favorably.

LIQUIDITY

Andina had CHP666,246 million of total debt and CHP143,305 million of cash and marketable securities as of June 30, 2015; the company has about CHP16,655 million of cash and equivalents in Argentina which Fitch considers as restricted cash. Short-term debt totaled CHP66,982 million. Andina generated approximately CHP102,681 million in FCF (net of CHP95,816 million in capex and CHP52,534 million of dividends) during the LTM ended June 30, 2015.

FULL LIST OF RATING ACTIONS

Fitch takes the following actions:

Embotelladora Andina S.A.
--Foreign currency and local currency long-term Issuer Default Ratings (IDRs) downgraded to 'BBB+' from 'A-';
--Senior unsecured notes downgraded to 'BBB+' from 'A-';
--National scale rating affirmed at 'AA(cl)';
--National senior unsecured debt affirmed at 'AA(cl)';
--National equity rating affirmed at 'Primera Clase Nivel 2'.