Fitch Affirms FEMSA and Assigns FEMSA Cerveza National Scale Ratings at 'AAA(mex)'.

MONTERREY, Mexico -- Fitch Ratings has affirmed the national scale rating of Femsa S.A. de C.V. (Femsa) at 'AAA(mex)' and assigned Femsa Cerveza S.A. de C.V. (FC) a national scale rating of 'AAA(mex)'. In addition, Fitch has affirmed the peso-denominated Certificado Bursatiles issues, FEMSA 04 and FEMSA 04-2, guaranteed by FC at 'AAA(mex)'. The Outlook for the ratings is Stable.

The rating's are based on FEMSA's solid business profile as one of the largest beverage companies in Latin America, its strong cash generation, and sound financial position. Through its subsidiaries Coca-Cola FEMSA (KOF) and FEMSA Cerveza the company is the second largest bottler of Coca-Cola products in the world and the second largest brewer in Mexico. The company also operates the largest convenience store chain in Mexico.

The underlying corporate credit rating of FEMSA is based upon the solid business positions and strong financial profiles of its two most important subsidiaries, KOF and FC. The rating is further supported by the low amount of debt at the FEMSA holding company level relative to the debt burden of KOF and FC. FEMSA's credit rating derives additional support from the free cash flow generating capacity of its third wholly owned subsidiary, Femsa Comercio. This subsidiary has very low leverage, with an estimated debt-to-EBITDA ratio of approximately 0.9 times (x).

FC is the second largest brewer in Mexico, with an estimated market share of 44.7%, and the third largest in Brazil with a 9% market share. In Mexico, as in most Latin America countries, barriers to entry in the beer industry are high. The barriers enjoyed by the company include its elaborate distribution system, the strong recognition of and loyalty to local brands, relationships with local sales outlets through exclusivity arrangements, high price-sensitivity of the consumer (imports have not been successful as they sell at a premium), and low penetration of supermarkets. During the next decade, FC is poised to benefit from rising income levels in Mexico, and favorable population demographics, which result in about two million potential new consumers per year in Mexico.

Export opportunities remain strong due to the popularity of Mexican beer in the U.S. and Femsa's successful partnership with Heineken in this market. Through the first nine months of 2006, exports grew at 15.9%. FC is also expected to benefit in the future from an improved performance from Kaiser, its Brazilian operation, which was acquired on January 2006. As of September 2006, Kaiser had generated close to US$21 million in EBITDA, with an EBITDA margin of 8.3% compared to a loss of US$14 million and a margin of negative 5.5% through the first nine months of 2005.

FC has historically maintained a very strong financial profile, with high cash levels, moderate debt and good free cash flow generation. Recently debt levels have grown, as the company has made a number of transactions and investments. For the Kaiser acquisition, the company used US$68 million in available cash and assumed US$60 million in debt. Subsequently, the company made cash payments on contingent liabilities related to taxes totaling US$198.7 million, which were funded with debt. Additionally, in November 2006, Femsa acquired an additional 8% equity stake in KOF from The Coca-Cola Company (KO) for US$427.4 million. The transaction was funded with US$242 million in available cash, most of which came from FC and US$185 million in debt raised at the FC level. FC's total debt-to-EBITDA ratio as of Sept. 30, 2006 was 1.4x, while its net debt-to-EBITDA ratio was 1.0x. On a pro-forma basis, taking into account the equity stake acquisition of KOF, it should have had a total debt-to-EBITDA ratio of about 1.9x at the end of 2006 and a net debt-to-EBITDA ratio of 1.7x. These credit ratios remain consistent with the 'AAA(mex)' rating category. They are expected to improve considerably within the next two years, as the company uses its cash flow from operations to repay debt.

KOF is the second largest bottler of Coca-Cola products worldwide with operations throughout Latin America. Fitch's 'AAA (mex)' national scale rating of KOF's peso-denominated unsecured debt reflects the company's outstanding track record of profitably selling soft drinks during all types of economic situations. KOF's success, which is reflected by some of the highest profitability ratios in the industry, is based upon a number of factors, including excellent product segmentation, channel and mix management and packaging innovation.

KOF is very important to KO, as it represents nearly 33% of its Latin American volume. KO's ownership stake in KOF is 31.6%. Importantly, KO has a track record of financially and operationally supporting its key bottlers. This, along with the cash flow diversification provided by KOF's operations, are positively factored into Fitch's credit evaluation of FEMSA.

The ratings also consider KOF's sound financial profile, as well as management's focus on debt reduction. The company's strong cash flow generation has allowed it to reduce net debt levels by approximately US$200 million through the first nine months of 2006. By year-end 2006, net debt levels should have been US$1.4 billion and net debt-to-EBITDA should have reached 1.2x, which compares favorably with the 1.6x it had at year-end 2005.

On a consolidated basis, FEMSA had a total debt-to-EBITDA ratio of 1.6x and a net debt-to-EBITDA ratio of 1.1x at Sept. 30, 2006. On a pro forma basis, considering the acquisition of the 8% equity stake in KOF, total debt-to-EBITDA at the FEMSA level should be 1.9x and net debt-to-EBITDA should be 1.7x. These ratios remain consistent with the 'AAA (mex)' rating category, given the company's outstanding business positions and its relationship with KO. Fitch expects FEMSA's consolidated leverage to decrease significantly as the company uses free cash flow to reduce debt.

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