Fitch Assigns 'BBB-' Local Currency Debt Rating To AmBev.

Business Editors

CHICAGO--(BUSINESS WIRE)--Nov. 26, 2001

Fitch has assigned a 'BBB-' senior unsecured local currency debt rating to Companhia de Bebidas das Americas (AmBev).

In conjunction with this rating action Fitch has assigned a 'BB-' senior unsecured foreign currency rating to AmBev. The Rating Outlook for the local currency rating is Stable and the Rating Outlook for the foreign currency rating is Negative. The foreign currency rating of AmBev is constrained by Fitch's 'BB-' Rating Outlook Negative rating of the government of Brazil.

AmBev's local currency rating is supported by the company's excellent business profile. During 2000, AmBev was the largest brewer in Brazil, with an estimated market share of 70%. AmBev's outstanding beer business is complemented by a good soft drinks business. In soft drinks, the company is the owner of the most popular guarana brand in Brazil, Guarana Antarctica. This gives the company a firm foundation from which to grow its soft drinks business, as guarana is the second most popular flavor in Brazil. It accounted for 25% of all soft drink sales in Brazil during 2001, trailing only the cola flavor, which accounted for 39% of sales. In colas, AmBev is also well positioned as the sole bottler and distributor of PepsiCo products in the country.

While AmBev's soft drinks market share is only 17%, the company has economies of scale unrivaled in the market because it is able to distribute soft drinks on its beer trucks. AmBev achieves additional synergies as a nationwide bottler of soft drinks. In contrast, the bottling and distribution of Coca-Cola products is spread out among 16 different bottlers.

The credit rating of AmBev also takes into consideration the strength of the company's management team, and its commitment to profitability. The financial targets of the company include a return on equity of 20% and a net debt-to-equity ratio range of 50%?55%.

Given the volatility of the Brazilian economy, Fitch believes the company's EBITDA-to-gross interest expense ratio should range between 4.0 times (x) and 6.0x during the next five years. This is consistent with the rating category, given the company's strong business position.

In the future, AmBev's profit margins are expected to expand. Top-line growth should occur in both soft drinks and beer, as the company capitalizes on major weaknesses of the fragmented Coca-Cola bottling system in Brazil, and of its main brewing competitor, Cervejarias Kaiser Brasil Ltda (Kaiser), to increase its market share. The company should also be able to leverage its size to capture additional revenue from retailers. Within the next three years, the company should be able to improve its cost structure by integrating the three distribution systems of its predecessor companies, Brahma and Antarctica. As a result of these actions, the company's EBITDA margins should increase from 29% in 2000, to more than 33% by 2003.

AmBev's local currency rating is constrained at the 'BBB-' level by several factors. The most important factor is the relatively volatile political and macroeconomic history in Brazil, which has slowed the development of stable governments and sound fiscal and monetary policies. This has led to difficult economic periods within the past decade, which were marked by hyper-inflation, currency instability, economic contraction and soaring interest rates. While Brazil's political and economic situation has been relatively stable since the Real Plan was implemented in 1994, a departure from the current policy framework by a future administration could return Brazil to a period of higher economic uncertainty. This, in turn, could change the way AmBev operates, forcing the company to return to a period in which price management is the main focus. This would stall the company's efforts to improve operating margins and per capita of beer through sophisticated management practices that are only appropriate in a stable pricing market.

As is the case throughout the world, the beer industry is a popular source of tax revenues in Brazil. In 2000, taxes accounted for 29% of the final sales price to consumers. In the future, the Brazilian government could seek additional tax revenues from the industry. This consideration is further factored into the rating.

AmBev's ratings are also constrained by the company's significant investment in Brazilian government securities (more than R$1 billion as of August 2001). While AmBev believes that it is necessary to hold large cash and marketable securities balances relative to its working capital needs in case international capital markets are 'closed' to Brazilian companies, doing so exposes the company to a significant amount of counterparty credit risk. Should the Brazilian government default on these notes, or a portion of them, AmBev would have to repay a substantial portion of its short-term debt with cash flow from operations, as a substantial portion of the investments were funded with short-term trade finance.

Importantly, the government securities owned by AmBev are an important source of financing for the Brazilian government. As of July 2001, approximately 75% of Brazil's public debt was real denominated. Furthermore, 40% of the government's debt falls due in the next year. As a result, of the unfavorable credit profile of Brazil's local currency debt, Fitch views it as highly unlikely that leading industrial companies that own these notes, such as AmBev, would be able to completely unwind their positions. Without the ownership of these notes by leading institutions in Brazil, the government would be challenged to roll over all of its debt that comes due in the next 12 months in a timely manner. Fitch rates the local currency obligations of the Brazilian government 'B+'.

AmBev is the largest brewer and soft drinks company in Brazil. The company operates 45 brewing or bottling plants and manages a distribution system that reaches more than one million points of sale. According to estimates by A.C. Nielsen, the company had estimated market shares of 69.9% in beer and 17.3% in carbonated soft drinks as of August 2001. Due to the size of the beverage markets in Brazil, this makes the company the fourth largest brewer in the world and the sixth largest beverage company.

AmBev complements its beer and soft drinks portfolios with beverages such as ice tea, isotonic sports drinks and mineral water. The company also has investments outside of Brazil, operating breweries in Venezuela, Argentina, and Uruguay.

AmBev was formed through the merger of Brazil's two largest beverage companies, Companhia Cervejaria Brahma (Brahma) and Companhia Antarctica Paulista Industria Brasileira de Bebidas e Conexos (Antarctica). This merger, which was initiated in 1999, received approval from Brazil's anti-trust agency Conselho Administrativo de Defesa Economica (CADE) on March 31, 2000, and was completed shortly thereafter.