USA: Fitch Ratings has upgraded the senior unsecured foreign currency rating of Companhia De Bebidas Das Americas (AmBev) to 'BB+' from 'BB-' and its unsecured local currency rating to 'BBB' from 'BBB-'. Both ratings were removed from Rating Watch Positive, Business Wire commented on December 22. The Rating Outlook is Stable.

Fitch has also upgraded the 2011 and 2013 notes of Companhia Brasileira de Bebidas (CBB), a wholly owned subsidiary of AmBev, to 'BBB' from 'BBB-'. The rating for these notes exceeds Brazil's sovereign rating of 'BB-' due to structural enhancements that mitigate certain political risks. These notes have also been removed from Rating Watch Positive. The Rating Outlook is Stable.

AmBev's upgrade reflects its increased geographic diversification of operations and cash flow, implicit support from its new parent company and lower overall cost of financing following the completion of the acquisition of AmBev by Interbrew, (renamed InBev). As part of the transaction, AmBev now directly owns 100% of Labatt Canada (Labatt), the second-largest brewer in Canada. Labatt is expected to diversify AmBev's cash flow and generate more than $500 million of EBITDA in 2004. The company should end the year with about $850 million of net debt. On a pro forma basis, Labatt should account for about 30% of AmBev's consolidated EBITDA and total debt. In 2003, AmBev's Brazilian operations, pre-acquisition, accounted for about 92% of the company's consolidated EBITDA. With the addition of Labatt, plus the growth of its other investments in Latin America, on a pro forma basis, in 2004 Brazilian operations would account for about 60% of consolidated EBITDA.

The upgrade also incorporates the overall strategic importance of AmBev to InBev. As a result of the acquisition, InBev now owns 68% of the voting shares in AmBev and has a 50% economic stake, which could increase to 84% and 57%, respectively, during the first half of 2005 through a mandatory tender offer (MTO) initiated by InBev. As of Dec. 21, 2004, AmBev's market capital is about $14.5 billion. On a pro forma basis, it would account for about slightly more than 50% of InBev's consolidated EBITDA in 2004. Also, the former controlling shareholders of AmBev now share control of InBev. These shareholders built AmBev into a diversified multinational beverage company over the past 15 years through a series of investments in Latin America. Given its comfort for operating in emerging markets, Fitch believes InBev's level of financial support for AmBev would be high during a political or economic crisis in Brazil.

Fitch's 'BB+' senior unsecured foreign currency rating of AmBev exceeds Brazil's country ceiling of 'BB-' due to the generation of a substantial amount of cash flow in a hard currency. Currently, AmBev could cover annual dollar debt service by more than 1 times (x) with hard currency from Labatt; about $250 million of LaBatt's cash flow is available to upstream to Ambev under the existing debt arrangements. This compares with annual U.S. dollar debt obligations of about $200 million per year by AmBev's Brazilian operating subsidiary. This debt service consists of approximately $100 million of amortizing debt and $100 million of annual interest expense on the notes due in 2011 and 2013. Alternatives are also available to provide hard currency and financial support from the shareholder through intercompany loans during times of sovereign stress. It is important to note that the foreign currency rating of AmBev is below the local currency rating of 'BBB' due to negative covenants on debt at Labatt that restrict the distribution of cash from it to AmBev by the following formula: EBITDA less interest charges, capital expenditures and cash taxes.

The 'BB+' rating also incorporates some uncertainty that exists surrounding InBev's financial strategy going forward. In addition, it is unclear under what circumstances and to what degree InBev would assist AmBev in making timely payment on the debt obligations of its Brazilian subsidiary in the event the Brazilian government would impose exchange controls or a moratorium on private-sector debt service. A new financial management team is slated to be in place on Jan. 1, 2005. Fitch does not anticipate that InBev will provide a full financial guarantee for the debt at AmBev, given the substantial position of minority investors in both companies. The increase in the rating of CBB's notes is due to the improvement in the underlying credit quality of AmBev, as reflected by the upgrade in its local currency rating to 'BBB' from 'BBB-.'

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