Investing.com -- Moody's (NYSE:MCO) Ratings has confirmed the Ba1 corporate family rating and senior unsecured notes rating for Arcos Dorados Holdings Inc (NYSE:ARCO). (Arcos Dorados). The ratings agency also reaffirmed the Ba1 rating for senior unsecured notes backed by Arcos Dorados B.V., a fully and unconditionally guaranteed entity by its parent company, Arcos Dorados. In addition, Moody's has assigned a Ba1 rating to proposed backed senior unsecured notes to be issued by Arcos Dorados B.V., also fully and unconditionally guaranteed by its parent, Arcos Dorados. All ratings carry a stable outlook.
The company plans to use the net proceeds from the notes to fund a tender offer conducted by Arcos Dorados through intercompany arrangements. These funds will be used to pay for the outstanding 5.875% senior notes due 2027 and for general corporate purposes. The proposed notes will rank equally with all other unsecured and unsubordinated debt obligations of the guarantors.
Arcos Dorados, the largest independent McDonald's (NYSE:MCD) franchisee worldwide by sales and number of restaurants, holds a solid market position in Latin America. The company's credit profile is supported by its geographic diversification, solid restaurant base throughout Latin America, and good liquidity. As of September 30, 2024, the company had $120 million in cash and short-term investments and access to unused $75 million in committed credit facilities.
In late 2024, Arcos Dorados renewed its Master Franchise Agreement (MFA) with McDonald's for a 20-year term, effective from January 1, 2025, with an option for a further 20-year renewal beginning January 1, 2045.
However, the ratings are constrained by Arcos Dorados' concentration of cash flow in a limited number of markets, with Brazil being the most significant contributor to both revenue and EBITDA. Other limiting factors include an intense competitive environment, moderate exposure to foreign currency risks, fluctuations in consumer purchasing power and preferences, and inflation-induced cost pressures on labor and raw materials.
Arcos Dorados' restaurant portfolio, with approximately half of its restaurants being free-standing units, is a competitive advantage in the region. The company's 4Ds' strategy (Digital, Delivery, Drive-thru, and Development) has effectively capitalized on the flexibility of its restaurant portfolio. As of Q3 2024, digital sales had increased by 16% year-over-year and made up 58% of Arcos Dorados systemwide sales.
The company is expected to benefit from steady revenue growth in the coming years, as it continues to expand its restaurant network, particularly in underpenetrated markets across Latin America. A robust focus on digital sales and delivery services, part of the successful 4Ds' strategy, complements this growth.
As of the twelve months ending September 2024, Arcos Dorados' Moody's adjusted gross debt to EBITDA was 2.6x. This ratio is expected to remain within the 2.5x-3.0x range through 2024-2025, despite currency depreciation, particularly in Brazil. To mitigate this risk, Arcos Dorados hedges a part of its US dollar-denominated cost of goods sold, specifically those related to food and paper imports.
The stable outlook reflects Moody's expectation of sustained good operating performance and liquidity over the next 12-18 months. Arcos Dorados will continue to pursue growth across the region under the investment requirements set by the Master Franchise Agreement (MFA) with McDonald's and benefit from increased operating efficiency.
Arcos Dorados is the leading quick-service restaurant operator in Latin America and the Caribbean and is McDonald's largest independent franchisee globally in terms of systemwide sales and restaurant count. The company has the exclusive rights to own, operate and grant franchises of McDonald's restaurants in 20 Latin American and Caribbean countries.
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