OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to FEMSA, S.A.B. de C.V.'s (FEMSA) issuances of EUR1 billion senior unsecured notes due in 2023. Net proceeds will be used for general corporate purposes. A full list of FEMSA's ratings is provided at the end of this release.

KEY RATING DRIVERS

Solid Credit Profile

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.

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 under the brand name OXXO and has the leading position in the convenience store segment. In 2015, OXXO reached 14,061 stores and opened on average more than 1,100 stores per year in the past three years with internally generated cash flow. Fitch also considers its growing presence in the drug stores chain in Mexico and its recent acquisition of a 60% equity stake in Socofar, a leading pharmacy operator South America with operations in Chile and Colombia. This transaction is considered positive to FEMSA Comercio as is aligned with its growth strategy in the pharmacy category, and it will provide geographical and product diversification in this business segment. As of December 2015 the company had 933 pharmacies in Mexico and more than 800 in South America.

Positive Retail Performance

FEMSA Comercio, the main source of cash flow generation for FEMSA at the holding level, maintained a positive growth trend in revenues and EBITDA despite weak economic conditions in Mexico during the first half of 2015. Fitch projects FEMSA Comercio's revenues will increase around 28% in 2016 and 13% in 2017, 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 2016 and 2017, as a result of the consolidation of lower margins operations from Socofar and the expansion of its gas stations business. In 2015, FEMSA Comercio's revenues increased 38% to MXN151.4 billion, while EBITDA margin decreased to 9.8% from 10.7% when compared to 2014.

Stable Leverage

Fitch's expects FEMSA's leverage, excluding KOF, will remain relatively stable on net debt basis when considering its hedged total debt position. Fitch projects that in the next 18 to 24 months, including debt associated with the EUR1 billion notes, FEMSA's excluding KOF, total debt to EBITDA will be close to 1.8x and its total net debt to EBITDA will be around 0.4x. FEMSA's financial strategy in the holding is to maintain debt mostly related to outstanding bonds, and for FEMSA Comercio, maintaining debt associated with revolving credit facilities at Socofar's subsidiary. Fitch anticipates that FEMSA will continue evaluating investments or acquisitions to strengthen its business portfolio without significantly changing its net debt position in the long term.

In 2015, including annual pro forma results of Socofar and excluding KOF, FEMSA's total debt to EBITDA and total net debt to EBITDA calculated by Fitch were 1.2x 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) of 2.8x and total adjusted net debt to EBITDAR of 2.1x.

Low FX Risk and Manageable Debt Profile

Fitch views FEMSA's exposure to its dollar denominated debt as low since the principal and interest payments of its senior notes were hedged into MXN. As of Dec. 31, 2015, FEMSA's excluding KOF total debt with the benefit of hedges was MXN19.7 billion (USD1.1 billion) compared to MXN25.1 billion (USD1.5 billion) reported. Upcoming debt maturities are manageable and include USD142 million due in 2016 and USD175 million due in 2017. Fitch expects FEMSA to refinance a portion of the maturities related to Socofar and pay down its local issuance due in 2017 of approximately USD145 million. Significant debt amortizations are not due until 2023.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for FEMSA include:
--Revenue growth, excluding KOF, of 28% in 2016 and 13% in 2017,
--EBITDA margin, excluding KOF, around 9% in 2016 - 2017;
--Total debt to EBITDA and net debt to EBITDA, excluding KOF, close to 1.8x and 0.4x, respectively, in the next 18 to 24 months;
--Total adjusted debt to EBITDAR and adjusted net debt to EBITDAR, excluding KOF, close to 3.2x and 2.2x, 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 thelong term.

LIQUIDITY

Strong Liquidity

FEMSA's cash and marketable securities, excluding KOF, was MXN13.4 billion (USD780 million) as of Dec. 31, 2015, and had short-term debt of MXN2.4 billion (USD142 million). Fitch expects that the company's liquidity position will strengthen with the proceeds from the EUR1 billion notes issuance, and forecasts that in the next two years that the company's cash balance will be higher than USD1.6 billion in the absence of significant acquisitions. In addition, sound annual free cash flow generation (FCF) of FEMSA Comercio and stable dividends payments from KOF and Heineken should also support its liquidity position. Fitch incorporates in FEMSA's ratings that its 20% equity stake in Heineken has an estimated market value of EUR8 billion which provides additional flexibility for the company's liquidity requirements.

FULL LIST OF RATING ACTIONS

Fitch currently rates FEMSA as follow
--Long-term foreign currency Issuer Default Rating (IDR) 'A';
--Long-term local currency IDR 'A';
--National scale long-term rating 'AAA(mex)';
--National scale short-term rating 'F1+(mex)';
--Senior notes for USD300 million due 2023 'A';
--Senior notes for USD700 million due 2043 'A';
--Local Certificados Bursatiles Issuances FEMSA 07U due in 2017 'AAA(mex)'.

The Rating Outlook is Stable.