OREANDA-NEWS. Fitch Ratings has affirmed Becle, S.A. de C.V.'s (Becle) foreign and local currency Issuer Default Ratings (IDR) at 'BBB'. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release.

Becle's ratings reflect its solid operating profile backed by the strong brand recognition of Jose Cuervo tequila, the integration across the supply chain for tequila production, as well as the relatively stable dynamics of the spirits industry, which is less subject to economic downturns than others. These factors have contributed to maintaining strong free cash flow (FCF) generation across the business cycle and a conservative capital structure with low debt levels and sound liquidity. The ratings are constrained by the product concentration in tequila, which represents close to 63% of its total revenues, strong competition within the alcoholic beverage industry, the volatility of prices in its main raw materials, and corporate governance practices.

KEY RATING DRIVERS

Strong Brand Recognition
Becle's ratings are supported by the strong brand recognition of its tequila Jose Cuervo, which is positioned as the leading tequila in the world in terms of sales volume. Jose Cuervo and other family brands also have an important geographical diversification with sales in more than 95 countries. The U.S. and Canada are its most important markets, accounting for around 53% of its total revenues, while the Jose Cuervo brand has the leading position in the U.S. tequila segment with around 40% market share in terms of volume. In Mexico, the company is the largest distributor of spirits and liqueurs in terms of volume and the second largest in terms of value and it contributes 29% of Becle's total revenues. The company's tequila products hold among the top three positions in every formal price segment in which they compete.

Bushmills Acquisition
Fitch believes that the acquisition of Bushmills Irish whiskey by Becle in 2015 has improved its product portfolio and should provide additional growth in the long term. The diversification of the company's product portfolio to a well-known brand in the Irish whiskey category along with Jose Cuervo tequila is bringing opportunities to leverage both brands and strengthen its business position and geographic footprint. Bushmills operations are expected to represent approximately 5% and 8%, of the company's consolidated volume and revenues, respectively. Also, Fitch takes into account Becle's exposure to one of the fastest growing spirits categories globally, with an average annual growth rate in the low double-digits. Bushmills' main markets are the U.S. and Europe, representing 23% and 73% of its sales volume, respectively.

Solid Operating Results
During 2015, Becle's operating results have benefited from the positive effect of the Bushmills acquisition, foreign exchange tailwinds and higher organic volume growth. For the first nine months as of Sept. 30, 2015, the company's sales volume increased 27% to 11.3 million 9-liter cases, while revenues increased 41% to MXN10.3 billion, compared to the same period last year. Lower advertising, marketing and promotions expenses coupled with higher revenues have benefited EBITDA margin, rising to 28% from 20% year over year for the same time period. Fitch projects that for 2015 the company's revenue will grow around 30%, mainly driven by higher sales volume of Margarita Mix in the U.S. and the integration of Bushmills. For 2016-2017 revenue growth should moderate to approximately 4%. Fitch also forecasts for 2015 that company EBITDA margin will be close to 34% and could gradually improve to 35% by 2017.

Stable Leverage
Fitch considers Becle's leverage is strong for the rating category and does not expect any material increase in its debt position in 2015-2017. Fitch projects the company's gross and net leverage should gradually decline to 1.5x and 0.5x, respectively, in the next 18 to 24 months through higher EBITDA generation. Becle's total debt-to-last 12 months (LTM) EBITDA and net debt-to-LTM EBITDA as calculated by Fitch were 1.6x and 0.8x, respectively, as of Sept. 30, 2015. These ratios are in line with Fitch's previous projections after including the acquisition of Bushmills. The company's total debt consists only of the USD500 million senior notes due in 2025. Fitch also believes that Becle's exposure to its dollar-denominated debt is low as more than 2/3 of its total revenues are denominated in USD or Euros and more than half of its total costs and expenses are based in Mexican pesos.

Strong FCF
Fitch expects Becle's strong FCF generation capacity to continue in the long term. During 2015 the company's expected cash flow from operations (CFFO) as calculated by Fitch of approximately MXN1.8 billion will be sufficient to cover capex of around MXN450 million and dividend payments of MXN1 billion. Fitch is projecting that for 2016 and 2017 Becle's FCF generation could reach levels higher than MXN1.6 billion annually after estimated capex of MXN500 million and MXN800 million, respectively, and stable annual dividend payments of MXN1.1 billion.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Becle include:
--Revenue growth of 30% in 2015 and 4% in 2016-2017;
--EBITDA margin around 34% in 2015 and improving towards 35% during 2016-2017;
--FCF higher than MXN1.6 billion in 2016-2017;
--Gross leverage gradually declining to 1.5x and net leverage to 0.5x by 2017.

RATING SENSITIVITIES
Negative ratings actions could result from a sustained deterioration in performance or a large debt-financed acquisition that significantly increases net leverage to above 2.0x. A change in the company's financial strategy towards a weaker capital structure could also lead to a negative rating action.

Fitch does not expect positive rating action in the near term. However, a greater diversification of its product portfolio and robust corporate governance structure, combined with sustained lower leverage ratios, higher FCF generation and stronger liquidity position could result in positive rating actions.

LIQUIDITY
Becle's liquidity position is ample. As of Sept. 30, 2015, the company cash balance was MXN4.3 billion and did not include short-term debt. With no debt maturities until 2025, the company has significant financial flexibility in the near- to long-term.

FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings
--Long-term foreign currency Issuer Default Rating (IDR) at 'BBB';
--Long-term local currency IDR at 'BBB';
--USD500 million senior notes due 2025 at 'BBB'.

The Rating Outlook is Stable