OREANDA-NEWS. Fitch Ratings has downgraded Grupo Embotellador Atic S.A.'s (Atic) Issuer Default Ratings (IDRs) to 'B-' from 'B+' and Ajecorp B.V.'s senior unsecured notes to 'B-/RR4' from 'B+/RR4'. The Rating Outlook remains Negative. A full list of rating actions follows at the end of this press release.

Atic's downgrade reflects the deterioration of its credit metrics to further levels than Fitch previously anticipated due to sharp currency devaluation in the second half of 2015 and throughout the first months of 2016. The downgrade also reflects increased competition in most markets and the failure of consumers to trade down from branded products to Atic products during economic distress in Latin America and Indonesia.

KEY RATING DRIVERS

Weak Operating Results

Fitch has revised its projections and expects Atic to generate about EUR80 million of EBITDA in 2015 instead of EUR100 million as previously projected. Volumes have decreased in Indonesia, Brazil, Thailand and Venezuela. Currency devaluations have been sharp in key markets such as Colombia, Indonesia, Brazil and Mexico and have hindered cash profits in those markets due to costs for inputs such as sugar and PET being closely tied to the U.S. dollar. EBITDA margins are now expected to be around 8% in 2015 and 2016, lower than 11% historical level.

High Leverage

The reduction in EBITDA coupled with debt increases have led to an upward trend on leverage. For YE2015 and 2016 Fitch expects a debt/EBITDA ratio of 7.3x and 7.0x, respectively. As of September 2015, Atic's total debt was EUR 540 million, 74% explained by the USD450 million senior unsecured notes due in 2022.

Strong Competition

The emerging market economic slowdown has boosted competition for Atic's targeted market segment, the mid- to lower-income consumer. In Colombia, a key market, pricing has been pressured by aggressive pricing policies by Coca-Cola and Pepsi bottlers. In Mexico and Indonesia, competition is mainly driven by Coca-Cola bottlers, while in Brazil (tubainas) and Thailand (ThaiBev) the company also competes with cheaper local competitors.

Cost Cutting Measures

The company has been taking steps to cover FX exposure and cut costs in its all-over operations, such as reducing back office and distributors, as well as marketing expenses in order to improve profitability in a more competitive environment. Atic is now focused on improving its product mix towards non-CSD products which have higher potential growth and less mature market than carbonated soft drinks. During 2015, the company renewed its management team (a new CFO was appointed in January 2016) and restructured operations in Brazil and Mexico. The results from these efforts were not felt in 2015 and could positively impact 2016 results relative to Fitch's expectations.

KEY ASSUMPTIONS

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

--Bloomberg Consensus currency forecasts for 2016 for the euro, Brazilian real, Mexican peso, Colombian peso, Indonesian rupiah, Thai baht and Peruvian Nuevo sol;
--Depreciation of 5% of the basket of Central America currencies for 2016;
--2016 Volumes: Brazil: -25%, Central America: +3%, Colombia: -5%, Ecuador: +3%, Indonesia: -15%, Mexico:-5%, Peru: +5%, Thailand:-10%, Venezuela: -15%;
--Corporate expenses reduced by 10%;
--Maintenance capex levels of about EUR45 million;
--Negative free cash flow in 2015 and 2016.

RATING SENSITIVITIES

Atic's ratings could face downward pressure if weak volumes or further currency volatility cause a significant deterioration in credit metrics. Failure to reach breakeven EBITDA in Brazil and Mexico could also lead to a negative rating action.

A positive rating action is not likely in the near term.

LIQUIDITY
Liquidity declined following two years of fund transfers to Atic's sister companies, Kinlest and Callpa, which develop operations in new markets, mainly in Asia and Africa. Related party receivables were EUR109 million as of Sept. 30, 2015. Cash and cash equivalents only cover short-term debt by 0.75x at the end of September.

Atic has typically operated with tight liquidity reporting a cash balance between EUR50-80 million in the last three years. Atic finances working capital needs with uncommitted credit facilities from local banks. The company does not face major debt amortizations until 2022. As of September 2015, short-term debt was EUR103 million, 36% allocated in Peru where operations have been performing better than other markets.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings:

Grupo Embotellador Atic S.A.
--Foreign currency long-term IDR to 'B-' from 'B+';
--Local currency long-term IDR to 'B-' from 'B+'.

Ajecorp B.V.
--Senior unsecured notes to 'B-/RR4' from 'B+/RR4'.

The Rating Outlook is Negative.