OREANDA-NEWS. Fitch Ratings has affirmed Turkey-based Coca-Cola Icecek A.S.'s (CCI) Long-term foreign and local currency Issuer Default Ratings (IDR) and senior unsecured rating at 'BBB'. The Outlook on the IDRs is Stable.

The affirmation of CCI's ratings reflects the company's sound profit performance in 2015 and its ability to maintain its conservative credit metrics, despite intense competition in Pakistan, the sharp devaluation of many of the currencies in its markets and an increase in the value of its foreign currency debt following a fall in the Turkish lira.

For 2016, while demand in central Asian markets is likely to remain subdued, we expect benefits on CCI's revenues and profit from improving prospects for consumption in Turkey and Pakistan. The operational ties and scope for tangible economic support by The Coca Cola Company (TCCC, A+/Negative) should this be needed, further underpin the ratings.

KEY RATING DRIVERS
Strong Coca-Cola Bottler
CCI is the fifth-largest bottler in the Coca Cola system and a key vehicle for TCCC's expansion into the Middle East, central Asia and Pakistan. Since 2007, CCI has been investing heavily in capex and M&A to grow in these regions. Due to strong and growing cash flow from operations, these investments have had limited adverse effects on CCI's credit metrics. In addition, CCI's results have shown resilience to economic cycles and the company's net debt/EBITDA has remained within 1.5x and 2.5x over 2009-2015.

Pricing Power, Lower Costs
At end-2015 consolidated net revenue (up 10% in Turkey; down 7.8% in international segment in USD terms, but, up 14.8% in Turkish lira terms) increased 12.3% mainly due to strong pricing, a favourable mix in Turkey and positive currency translation effects while volumes grew only 1.9%. The company also managed to cap cost increases on a combination of hedging of input costs and currency exposure in Turkey and lower raw material prices. As a result, on a consolidated basis EBITDA grew by a still strong 9%, albeit less than revenues.

For 2016, while international operations would still suffer from weak demand and currency headwinds in central Asia as well as security issues in the Middle East, we expect CCI's profits in Turkey to benefit from an improved outlook for consumer spending in the country. Fitch expects consumer spending to be the main growth contributor to the country's GDP in 2016, driven by a 30% hike in the minimum wage, lower oil prices and a potential loosening of credit conditions in April. The agency recently revised upwards its GDP growth for Turkey to 3.5% for 2016.

Volumes and Mix Drive Growth
Over the medium-term, CCI's performance should continue to benefit from consistent growth in volume and price per unit case, driven by a young population, low soft drinks penetration in its countries of operations and the ability to push sales growth, particularly in Turkey, on the more profitable 'immediate consumption' channel. The company's operations are well balanced across the more established Turkish business (50% of 2015 EBITDA) and the higher potential growth international subsidiaries (50%).

Forex Exposure and Mitigation
Against a majority of CCI's debt denominated in dollars and euros at end-2015, cash flow remains generated mainly in Turkish lira and other Middle Eastern and central Asian currencies. In 2015, the appreciation of the USD led to an increase of CCI's gross debt in Turkish lira by almost 30%.

However, CCI has historically mitigated the impact of TLR depreciation through increasing prices and scaling down capex, keeping its credit metrics intact. Conservative shareholder distributions further support cash flow. In 2015, price increases and a benign cost environment enabled CCI to almost fully finance capex of TLR828m (equal to a historically high 12.3% of net revenues) while keeping free cash flow (FCF) absorption to a minimal TLR-54m. Net lease adjusted funds from operations (FFO)-based leverage has remained unchanged at 2.4x since 2014. For 2016, management intends to scale down capex to 7% of net revenues.

Limited Deleveraging Prospects
CCI's efforts to preserve cash flow during challenging times are counterbalanced by the company's ambition to remain the leading player in a region characterised by strong growth opportunities. This means the company must be able to swiftly invest in production capacity and coolers as and when demand growth resumes after times of contraction as well as spend on M&A activity when opportunities arise. This limits CCI's deleveraging capacity. The ratings continue to factor in our forecasts of FFO adjusted net leverage of between 2.0x and 2.5x and FFO fixed charge cover of above 6.0x. These are strong credit ratios for the ratings and relative to other Coca-Cola bottlers.

Ratings Incorporate Implied TCCC Support
While the legal linkages between CCI and TCCC (which owns 20.1% of CCI) are weak, the operational and strategic relationship (CCI represents an entry point for TCCC to fast-growing markets) between the two companies is strong. This includes TCCC's influence over major decisions, its licensing of strong global brands, price mechanisms that can partly protect profits from currency fluctuations, and marketing expertise. This is reflected in a one notch uplift to CCI's rating from the company's standalone rating.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Coca Cola Icecek include:
-TLR/USD exchange rate at 3.10 in 2016, and 3.12 from 2017 onwards;
-Volumes in Turkey to grow at low single digits with average price per unit case rising at a conservative rate of around 4% for 2016-2019;
-International volume to grow at low single digits and average price per unit case declining (as a result of price increases not sufficiently offsetting adverse currency movements in central Asia) by 6% in 2016 before gradually stabilising over 2017-2019;
-Consolidated EBITDA margin for 2016 at 15.5% (2014:15.3%);
-Positive FCF (after dividends) due to lower capex of 7% to net sales but dividends capped at 35% of distributable net income;
-Minimal M&A spending;
-Adequate liquidity.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
-As the highest rated corporate in Turkey, an upgrade of the IDRs is unlikely due to CCI's limited scale, diversification and forex exposure.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
-A material permanent deterioration in FCF generation or large acquisition leading to lease-FFO adjusted net debt above 2.5x for an extended period along with FFO fixed charge coverage below 6x.
-Diminishing of CCI's strategic or operational ties with TCCC or geopolitical developments affecting its international operations.
-Adverse impact of a sharp devaluation of the Turkish lira on the company's credit metrics not accompanied by adequate cash preservation measures such as dividend and capex reduction.
-A downgrade of the Country Ceiling for Turkey, which would lead to a downgrade of the foreign currency IDR.

LIQUIDITY
Liquidity was supported by unrestricted cash (as defined by Fitch) of TLR811m at end-2015, approximately USD1.7bn in undrawn uncommitted (as typical in Turkey) bank lines, as well as strong relationships with both local and international banks. CCI's next major maturity is in 2018 when TLR1,887.4m of debt becomes due.