Fitch Ratings Assigns 'BB' to Bavaria's Notes.

Business Editors

CHICAGO--(BUSINESS WIRE)--Oct. 2, 2003

Fitch Ratings has assigned 'BB' senior unsecured foreign and local currency ratings to Bavaria S.A. (Bavaria). The Rating Outlook for Bavaria's foreign currency rating is Negative and the Rating Outlook for its local currency rating is Stable. The Rating Outlook for the foreign currency rating is constrained by Fitch's ratings of the Colombian government at 'BB' Rating Outlook Negative. In conjunction with these ratings, Fitch has assigned a 'BB' rating to Bavaria's proposed US$400 million senior notes due in 2010. The Rating Outlook for these U.S. dollar denominated notes is Negative.

Bavaria is a Colombian operating company with breweries and other beverage facilities in Colombia. Bavaria also holds direct and indirect equity interests in several beer companies throughout Latin America. The senior notes will have joint and several financial guarantees from the following subsidiaries of Bavaria: Malteria Tropical S.A. (Malteria), Productora de Jugos S.A. (Jugos), Cerveceria Union S.A. (Cervunion), Latin Development Corporation (Ladco) and Cerveceria Nacional de Panama S.A. (CN).

The 'BB' rating for the proposed senior unsecured notes is supported by the company's leading position in the beer industry of Colombia, Peru, Ecuador and Panama. During 2002, Bavaria had estimated market shares in each of these countries of 98.3%, 99.0%, 94.5% and 80.4%, respectively.

These leading positions reflect the high barriers to entry in the Latin American beer market. In addition to cultural reasons, international brewers have shied away from entering the company's markets because of the strong -- and almost nationalistic -- brand equity of the company's flagship brands, such as Aguila and Cristal. Furthermore, entering a market such as Colombia or Peru would be costly due to the dearth of supermarkets and the prevalence of on-premise consumption of beer in most of Bavaria's key markets. On-premise consumption makes an elaborate distribution system essential, which is difficult and expensive to duplicate. Imports are not a factor in the company's markets due to the low price paid for beer in the region, which is primarily a result of the almost exclusive use of the returnable glass bottle in the region.

Similar to most brewers in Latin America, Bavaria generates strong, albeit volatile, free cash flows. Sales are typically on a cash basis. Capital investments will be modest in the future as a result of excess production capacity in the company's key Colombian and Peruvian markets. Unlike Western Europe or the United States, a high percentage of the population in Latin America is under 40 years of age, which is the key target market for beer companies.

Bavaria operates in several non-investment grade countries. Fitch's ratings of these countries are as follows: Colombia ('BB', Rating Outlook Negative), Peru ('BB-', Rating Outlook Negative), Ecuador ('CCC+', Rating Outlook Positive) and Panama ('BB+', Rating Outlook Negative). As a result, political and economic risk in the countries in which the company operates is high. Low-rated sovereigns, at times, can have rapid changes in political leadership and economic policies. Bavaria is vulnerable to higher taxes on beer, as the largest taxpayer in the aforementioned countries. Furthermore, with market shares of nearly 100% in its top markets, Bavaria remains susceptible to philosophical changes at anti-trust agencies in the region. Historically, these agencies have been focused on preventing monopolistic behavior, not monopolies per se.

Modest increases in competition have been factored into Fitch's ratings. On Feb. 19, 2003, the Brazilian based brewer Companhia de Bebidas das Americas (AmBev) announced plans to start greenfield operations in Lima, Peru, by building a brewery that will have an annual production capacity of one million hectoliters. This plant should be completed during 2004. It is possible that AmBev, which is the largest brewer in Latin America, will also build a plant in Colombia. Fitch does not expect AmBev to dramatically erode Bavaria's market position in Peru and Colombia during the next five to ten years in these markets. The ratings reflect some concern, however, that if AmBev aggressively discounts the prices for its beer in these markets, as it did when it entered the Argentine market, Bavaria's profit margins could be pressured.

Fitch views the underlying credit quality of Bavaria to be consistent with a 'BB+' rating. The rating of the senior notes has been notched to the 'BB' level, however, to reflect the structural subordination of the notes to secured loans of US$318 million with the International Finance Corporation (IFC) and US$100 million of loans with Corporacion Andina de Formento (CAF) as well as debt at operating companies in Peru (US$281 million as of June 30, 2002) and Panama (US$45 million). In addition, unlike the US$318 million loan from the IFC, the notes do not enjoy a financial guarantee from the company's subsidiaries in Ecuador. The notch from 'BB+' to 'BB' also reflects different recovery rates between the company's secured and unsecured debt. The IFC and CAF loans are secured by Bavaria's breweries in Barranquilla and Itagui, as well as by upstream guarantees from several operating subsidiaries.

In spite of owning 74% of the voting shares in its Peruvian subsidiary Union de Cervecerias Peruanas Backus y Johnston S.A.A. (Backus), Bavaria's total economic stake in this company is 38%. Should Bavaria increase its economic stake in Backus to approximately 75%, Fitch may view the company's cash flow and currency diversification from outside Colombia to be sufficient for rating Bavaria's foreign currency debt above the sovereign rating of Colombia.

Fitch expects Bavaria to generate approximately US$610 million of operating income plus depreciation and amortization (EBITDA) during 2004. With capital expenditures expected to be approximately US$100 million, taxes projected to be US$150 million, interest expense estimated to be about US$170 million and changes in working capital likely to be around US$30 million, Bavaria should generate approximately US$160 million of free cash flow. With dividends anticipated to be about US$60 million, the company should have about US$100 million that it can use to reduce its debt to less than US$1.8 billion by the end of 2004. These figures translate into a total debt-to-EBITDA ratio of 3.0 times (x) and an EBITDA-to-interest expense coverage of 3.6x, which are both consistent with the rating category.

Fitch believes that Bavaria (on an unconsolidated basis) and the financial guarantors of the unsecured notes will generate about US$300 million of EBITDA in 2004 and have about US$1.3 billion of debt. Additional financial support for the bonds could come from the free cash flow of Backus, which should total about US$70 million in 2004. These funds should be available to Bavaria, given its level of ownership in Backus. These figures translate to a total debt-to-EBITDA ratio of 3.5x.

As of June 30, 2003, Bavaria had US$341 million of off-balance-sheet guarantees and contingent liabilities. Due to the nature of these liabilities, Fitch believes the financial risk to Bavaria to be approximately US$50 million. Most of these liabilities occurred as a result of the spin off of Bavaria's non beverage businesses into a company called Valores Bavaria S.A. (VB). Importantly, Bavaria's loans from IFC have a covenant that prohibits the company from guaranteeing any obligations of VB in the future.

For additional information, please reference a credit analysis report of Bavaria S.A. (Bavaria) that has been released to Fitch's web site at 'www.fitchratings.com'.