Fitch Affirms Arcos Dorados' Ratings at 'BBB-'; Outlook Stable

  Fitch Affirms Arcos Dorados' Ratings at 'BBB-'; Outlook Stable

Business Wire

RIO DE JANEIRO -- June 20, 2013

Fitch Ratings has affirmed the following ratings of Arcos Dorados B.V. (AD)
and Arcos Dorados Holdings Inc. (Arcos):

AD

--Foreign currency Issuer Default Rating (IDR) at 'BBB-';

--Local currency IDR at 'BBB-';

--USD450 million senior unsecured notes due 2019 at 'BBB-'.

Arcos

--Foreign currency IDR at 'BBB-';

--BRL675 million senior unsecured Brazilian-real notes due 2016 at 'BBB-'.

The 2019 notes issued by AD are guaranteed jointly and severally,
unconditionally and irrevocably by all relevant subsidiaries, while the 2016
notes issued by AD Holdings are fully and unconditionally guaranteed by AD and
relevant operating companies.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The ratings reflect Arcos' solid consolidated financial profile, with
consistent and stable operating margins, moderate leverage and strong
liquidity. The company's cash flow generation capacity is concentrated in
investment-grade countries, which adds some stability to the results. The
ratings also consider Arcos' geographic diversification and business strength
as the largest McDonald's franchisee in the world with operations in 20
countries in Latin America, the strength of McDonald's as franchisor, and its
longstanding relationship with Arcos' owners and management. The company's
high transferability risk in its operations in Venezuela and Argentina, the
aggressive expansion plan and strong competition were also incorporated in the
analysis.

Arcos is the indirect holding company of AD. Arcos' ratings assume all its
debt issuances would be fully and unconditionally guaranteed by AD and the
relevant operating companies, and will rank pari-passu with AD's senior
unsecured debt.

Business Strength Benefits the Company

Arcos is the largest McDonald's franchisee in the world in terms of
system-wide sales and number of restaurants. The company purchased the Latin
American operations of McDonald's in August 2007 by signing a Master Franchise
Agreement (MFA) for 20 years with renewable options. The MFA sets strict
strategic, commercial and financial guidelines for the operations of Arcos,
which support the operating and financial stability of the business as well as
the underlying value of the McDonald's brand in the region. As of March 2013,
the company operated or franchised 1,959 McDonald's-branded restaurants, 339
McCafe units and 1,997 Dessert Centers. About 75% of the restaurants are
operated by Arcos, and the remaining 25% are franchised restaurants.

Stable Operating Margins

Arcos has been successful in preserving its operating margins in different
macroeconomic conditions. In the LTM ended March 2013, Arcos reported net
revenues of USD3.853 billion, compared to USD3.797 million in 2012 and
USD3.658 million in 2011. In 2012, systemwide comparable sales growth was
9.2%, a reduction compared to 13.7% in 2011, due to lower growth in Brazil,
NOLAD and SLAD regions. Despite lower sales growth, Arcos has been able to
preserve stable EBITDAR margins. In the LTM ended March 2013, EBITDAR was
USD509 million and EBITDAR margin 13.2%. From 2009 to 2012, EBITDAR margin
ranged between 13.3% and 14.4%.

The company's cash generation is concentrated in investment-grade countries.
In the LTM ended March 2013, Brazil represented 47% of the company's
consolidated revenues and 55% of EBITDA, excluding corporate expenses. During
this period, the SLAD region contributed with 35% of EBITDA, NOLAD region with
7% and Caribbean with 3%. Arcos still has the challenge to recover its
operating performance in Mexico.

Strong Liquidity

Arcos has a comfortable liquidity and an extended debt maturity profile. As of
March 31, 2013, cash and marketable securities was USD145 million and total
adjusted debt was USD1.9 billion, including off-balance-sheet debt of USD1.2
billion related to rental expenses, as per Fitch's methodology. Cash reserves
covered 3.3 times short term debt of USD44 million. The company has only high
debt maturities of USD337 million in 2016. Liquidity also benefits from USD50
million of committed credit facility.

Leverage Should Remain Moderate

Arcos was able to preserve relatively stable leverage ratios over the past few
years, despite high investments. In the LTM ended March 2013, the company
reported net debt/EBITDA ratio was 1.7x, while net lease adjusted debt/EBITDAR
was 3.5x. These ratios compare with an average of 1.5x and 3.2x, respectively,
from 2009 to March 2013. Fitch does not expect a reduction in leverage ratios
in the next few years, as the company will continue its expansion plans, and
net lease adjusted debt/EBITDAR should remain around 3.5x.

Free Cash Flow Pressured by High Capex

Arcos' aggressive expansion plan should continue to pressure the company's
cash flow. In the LTM ended March 2013, Arcos generated USD219 million of
funds from operations (FFO) and USD208 million of cash flow from operations
(CFFO). These numbers compare with USD241 million and USD230 million,
respectively, in 2012. CFFO was insufficient to cover capital expenditures of
USD291 million and dividends of USD50 million, and free cash flow (FCF) was
negative USD133 million in the period. The company' strategy is to open 136
restaurants in 2013 (net openings), with investments of USD280 million. In
2014, net openings should increase to 141 restaurants, with an estimated
capital expenditures of USD374 million. Although planned investments are high,
Fitch notes that Arcos has the flexibility to reduce investments to the
minimum levels set under the MFA.

High Transferability Risk in Venezuela and Argentina

Arcos is exposed to high transferability risk in its Venezuelan operations.
Restrictions imposed by the Venezuelan Central Bank have limited the U.S.
dollar supply in that country, which constrains the repatriation of available
cash and restricts the payment of imported goods and royalties. Following
recent measures announced by the local government, Arcos obtained a temporary
waiver to reduce royalty payments to McDonald's Corporation in 2013. Arcos has
139 restaurants in Venezuela and represented 19% of consolidated operating
income in 2012. Arcos is also exposed to transferability risk in its
Argentinean operations. However, this risk is partially mitigated by the fact
that local operations do not generate excess cash, as Arcos' headquarter is
based in Argentina.

RATING SENSITIVITIES

Ratings could be positively affected by higher than expected cash generation
from investment-grade countries (i.e. faster growth in Brazil and sound
recovery of Mexico's performance) that would lead to a material improvement in
leverage metrics.

Ratings could be negatively affected by higher than expected investments,
pressuring free cash flow and leverage ratios. Additional factors that could
lead to a consideration of a Negative Outlook or a downgrade include:

--A material adverse action by the Venezuelan government;

--Weaker and slower than expected recovery in Mexico's performance;

--Significant deterioration of same store sales; and/or

--Failure to comply with the terms of the MFA.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Parent and Subsidiary Rating Linkage' (Aug. 10, 2012);

--'National Ratings - Methodology Update' (Jan. 19, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

National Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794086

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Contact:

Fitch Ratings
Primary Analyst
Fernanda Rezende, +55-21-4503-2619
Director
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP:
20010-010
or
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Gabriela Catri, +54-11-5235-8129
Director
or
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Senior Director
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