Brazil: Fitch upgrades foreign currency rating of AmBev to ‘investment grade’

Fitch Ratings announced on January 30 it has upgraded the senior unsecured foreign currency rating of Companhia de Bebidas Das Americas (AmBev) to 'BBB-' from 'BB+'. The company's 'BBB' local currency rating has been affirmed by Fitch, as well as the 'BBB' ratings of AmBev's political-risk-insured notes due in 2011 and 2013, according to Business Wire’s statement. All the ratings will now have a Stable Rating Outlook.

The upgrade of AmBev's foreign currency rating to investment grade is a result of the recent restructuring of the debt at the company's Canadian subsidiary, which allows it to more easily meet the dollar obligations of its Brazilian operations with cash flow generated in hard currencies. To a lesser extent, the upgrade incorporates the improving financial and political situation in Brazil, which Fitch noted on Oct. 11, 2005 when it revised the Rating Outlook on Brazil's sovereign rating to Positive from Stable, and also reflects the increasing importance of AmBev to InBev.

AmBev generated BRL4.4 billion of EBITDA during the first nine months of 2005. The company's Brazilian operations were the most important generator of cash flow, accounting for 67% of the consolidated EBITDA figure. AmBev's North American operations, which are carried out under its Canadian subsidiary, Labatt, were the next most important component of its consolidated EBITDA, representing 24% of the total. At the end of September, AmBev had BRL7.1 billion of debt and BRL1.1 billion of cash and marketable securities. These figures translate into a total debt-to-EBITDA ratio of 1.2 times (x) and a net debt-to-EBITDA ratio of 1.0x.

About 29% of AmBev's consolidated debt is located at Labatt. During November 2005, Labatt refinanced its short-term debt with a CAD900 million five-year syndicated loan. The company also obtained a CAD300 million five-year committed revolving credit facility at that time, which it did not draw down. These new loan agreements do not contain negative covenants that restrict Labatt's ability to upstream cash to AmBev. Under the restrictive old agreements, Labatt's distribution of its cash flow to AmBev was limited by the following formula: EBITDA less interest charges, capital expenditures, and cash taxes. Consequently, AmBev is now able to cover the annual dollar debt service of its Brazilian subsidiary by about 2.0x with hard currency generated annually by Labatt. AmBev's Brazilian subsidiary's U.S.-dollar debt service consists of approximately $200 million of amortizing debt and $100 million of annual interest expense on the notes due in 2011 and 2013.

AmBev continues to be an integral part of InBev, the world's largest brewer by volume. During the first nine months of 2005, InBev's North America and Latin America operations accounted for 50% of its sales volume and 58% of its consolidated EBITDA. On Dec. 27, 2005, InBev announced that its board had appointed Carlos Brito to its CEO position. Mr. Brito was the CEO of AmBev prior to its purchase by InBev. After the acquisition, he became the company's Zone President for North America, giving him primary responsibilities for implementing changes at Labatt.

AmBev is the largest brewer and soft drink company in Brazil with estimated market shares of 68% and 17%, respectively. Through its subsidiary Labatt, it is also the second-largest brewer in Canada. AmBev has leading market positions in Argentina, Bolivia, Paraguay, and Uruguay through its joint venture with Quinsa. AmBev's controlling shareholder is InBev, which owns 72.9% of the company's voting shares and has a 55.7% economic stake in the company.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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