Coca-Cola HBC Outlook Revised To Stable On Stabilizing Profitability And Credit Metrics; 'BBB+/A-2' Ratings Affirmed

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1 Research Update: Coca-Cola HBC Outlook Revised To Stable On Stabilizing Profitability And Credit Metrics; 'BBB+/A-2' Ratings Affirmed Primary Credit Analyst: Maxime Puget, London (44) ; Secondary Contact: Karin Erlander, London (44) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List MAY 22,

2 Research Update: Coca-Cola HBC Outlook Revised To Stable On Stabilizing Profitability And Credit Metrics; Overview We anticipate that Switzerland-based Coca-Cola HBC AG (CCH) should see its profitability stabilizing in , with declining revenues offset by a combination of lower raw materials costs, some cost restructurings, and price increases in some markets. We forecast that lower interest expenses and control on working capital and capital expenditures should support credit metrics remaining consistent with an "intermediate" financial risk profile. We are therefore revising the outlook on CCH to stable from negative, and affirming the corporate credit ratings at 'BBB+/A-2'. The stable outlook reflects our view that CCH's profitability and cash flow generation should stabilize at current levels in the next two years with revenue decline gradually easing in some of its major markets and improvements in the operating cost base. Rating Action On May 22, 2015, Standard & Poor's Ratings Services revised to stable from negative the outlook on Switzerland-based beverage manufacturer Coca-Cola HBC AG (CCH). We affirmed the long-and short-term corporate credit ratings on CCH at 'BBB+/A-2'. At the same time, we affirmed the 'BBB' issue ratings on CCH's senior unsecured debt instruments and the 'A-2' short-term issue rating on the commercial paper program. Rationale The outlook revision reflects our view that CCH's operating performance and cash flow generation should gradually stabilize in Its single-digit revenue decline, owing mostly to lower sales in emerging markets, should offset lower raw material and selling and distribution costs, in our view. Lower interest expenses following debt refinancing and repayment, as well as stable capital expenditures (capex) and dividend payments, should support cash flow generation and credit metrics. Our forecast of a revenue decline of 4% in 2015 and 2% in 2016 is based on our assumption of continuous high volatility in foreign-exchange movements in MAY 22,

3 Russia and Nigeria. We are also cautious on demand growth prospects for sparkling beverages in major markets like Russia, Italy, and Greece, where weak macroeconomic environments weigh on consumer spending. However, we think that consumer demand and volume growth should be stable to positive in important markets like Nigeria, Switzerland, and Poland. Despite the low revenue growth prospects for CCH, we believe that the sharp fall in commodity prices is positive for the group's operating cost base. Lower raw material and energy costs (sugar, plastics, fuel) and efforts to reduce selling and distribution costs by consolidating some of its operations in Eastern Europe, should help CCH to maintain an EBITDA margin of around 12% in Although the margin has declined from 16% in 2010, we believe that 12% remains standard for the beverage sector. CCH's "satisfactory" business risk profile continues to be supported by its leading market positions in 28 countries across Europe and in Nigeria. CCH has a large industrial scale and distribution footprint, and relatively well-spread geographical diversity. CCH benefits from the strong brand equity in sparkling beverages of Coca-Cola, for which CCH has exclusive bottling rights for its local markets until Sparkling beverages today account for around two-thirds of the group's volumes and the strong brands, in our view, offer CCH pricing power against competitors and retailers. For , we forecast CCH to generate discretionary cash flow of around 110 million- 150 million. Our forecast is based on EBITDA of around 720 million- 750 million, lower interest expenses after the repayment of higher-cost debt, control on working capital, and stable capex and dividend payments. We note in particular CCH's flexibility in managing expansion capex in emerging markets. As a result, we anticipate that net debt levels should be stable at around 1.7 billion- 1.8 billion, assuming no debt-financed acquisitions or asset disposals. Finally, we also view positively CCH's track record in managing debt leverage, which has historically remained moderate at around 2.5x debt to EBITDA. Our base-case financial projections for assume: Revenues of 6.25 billion in 2015 (4% year-on-year decline) and 6.1 billion in 2016 (2% year-on-year decline), due mostly to high currency exchange volatility in emerging markets like Russia, Nigeria, and Ukraine. We also assume flat to slightly lower demand in some mature markets like Italy and Greece due to weak consumer spending. We expect stable revenues in important markets like Poland and Switzerland. EBITDA of 720 million- 750 million (EBITDA margin of 12%), with lower revenues offset by lower raw materials and energy costs as well as lower fixed selling and distribution costs. Funds from operations (FFO) of 575 million- 590 million with lower interest expenses following debt refinancing and repayment. Discretionary cash flow of 110 million- 150 million, with slightly positive working capital movements and stable capex and dividend payout ratio. Net debt of 1.7 billion- 1.8 billion. We apply a 15% haircut to surplus MAY 22,

4 cash. Based on these assumptions, we arrive at the following credit measures: Funds from operations (FFO) to debt of 30%-35%. Debt to EBITDA of around 2.3x-2.5x. We assess CCH as "moderately strategic" to The Coca-Cola Co. (TCCC; AA/Negative/A-1+), as CCH is a Coca-Cola "dedicated purchaser." We apply an upward adjustment of one notch to CCH's 'bbb' stand-alone credit profile to reflect the potential extraordinary support TCCC could provide to CCH in case of need. Our assessment reflects our view that TCCC has a strong economic incentive to support CCH due to the size of its investment in the Switzerland-based bottler, the longstanding and important amount of trade flows between the companies, and the reputation risk from CCH sharing the Coca-Cola name. The 'BBB' rating on CCH's senior unsecured debt one notch below the 'BBB+' corporate credit due to structural subordination. We calculate that the ratio of priority liabilities to total adjusted assets was above 20% as of Dec. 31, Priority liabilities to the senior unsecured debt include trade payables, pension liabilities, loans from third parties and finance leases notably. Liquidity We believe that the ratio of liquidity sources to uses will be above 1.2x in the next 12 months, which is consistent with an "adequate" liquidity assessment, according to our criteria. Principal liquidity sources are: 636 million of cash balances as of Dec. 31, 2014; 500 million undrawn committed credit lines maturing in over one year; and Our forecast for cash FFO of around 550 million per year in 2015 and Principal liquidity uses are: 549 million of debt due in 2015 and 643 million of debt due in 2016; Our forecast of 145 million maintenance capex; and 132 million of dividend payments in Outlook The stable outlook reflects our view that CCH's operating performance and cash flow generation should stabilize at current levels in Revenue growth prospects, in our view, remain constrained by potential high currency-exchange volatility in emerging markets (Russia, Nigeria) and uncertainty on the strength of consumer spending in countries like Italy and Greece. However, we believe that demand should stabilize in other major markets in Europe and profitability be supported by lower raw materials and energy costs and some cost restructurings. We see a Standard & Poor's-adjusted MAY 22,

5 FFO-to-debt ratio of more than 30% and an adjusted debt-to-ebitda ratio of below 3x as commensurate with the current ratings. Downside scenario We could downgrade CCH if we see a further deterioration in operating performance, such as a further decline in EBITDA margin to 10% in We think this could occur if there is a higher-than-expected revenue decline in in major mature and developing markets in Europe like Switzerland, Poland, or Italy. We could also consider lowering the ratings if CCH were unable to raise prices in highly inflationary markets. We would lower the rating if the adjusted FFO-to-debt ratio declines to below 30% and the adjusted debt-to-ebitda ratio rises over 3x on a sustained basis. Upside scenario We could upgrade CCH if we see a strong and sustainable rebound in consumer demand and the EBITDA margin returning to pre-2011 levels of around 16% (which is not our base-case scenario for ). We consider that this could occur if a higher consumer demand for sparkling beverages in major developed and developing markets in Europe drives volumes up, possibly supported by a stabilization of consumer demand and currency-exchange volatility in Russia. We would consider raising the ratings if we see the adjusted FFO-to-debt ratio rising to over 45% and the adjusted debt-to-ebitda ratio declining to below 2x. Ratings Score Snapshot Corporate Credit Rating: BBB+/Stable/A-2 Business risk: Satisfactory Country risk: Intermediate Industry risk: Intermediate Competitive position: Satisfactory Financial risk: Intermediate Cash flow/leverage: Intermediate Anchor: bbb Modifiers Diversification/portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Liquidity: Adequate (no impact) Financial policy: Neutral (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Neutral (no impact) Stand-alone credit profile: bbb MAY 22,

6 Group credit profile: aa Entity status within group: Moderately strategic (+1 notch) Related Criteria And Research Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Corporate Methodology, Nov. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Group Rating Methodology, Nov. 19, 2013 Key Credit Factors For The Branded Nondurables Industry, May 7, 2015 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Ratings List Ratings Affirmed; Outlook Action To From Coca-Cola HBC AG Corporate Credit Rating BBB+/Stable/A-2 BBB+/Negative/A-2 Ratings Affirmed Coca-Cola HBC Finance B.V. Senior Unsecured* BBB Commercial Paper* A-2 Coca-Cola HBC Finance PLC Commercial Paper* A-2 *Guaranteed by Coca-Cola HBC AG. Additional Contact: Industrial Ratings Europe; Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) MAY 22,

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