Coca-Cola Hellenic Bottling Co. SA bondholders are losingconfidence in the firm's plan to leave Greece on concern the costof the move will trigger a credit-rating downgrade for the nation'sbiggest company.

The extra yield investors demand to own Coca-Cola Hellenic'smost-traded notes over the safest government debt plunged onepercentage point on Oct. 12, the day after the company said itplanned to move its headquarters to Switzerland. Since then, thespread on the 4.25 percent bond due 2016 has widened by 0.61percentage point to 232 basis points.

While the world's second-largest Coke bottler says it will getcheaper funding by exiting a nation that has contracted for 17quarters as strikes and protests against austerity measuresparalyze the economy, the notes have lost almost 60 percent of thegain on speculation the move will add too much debt. Moody'sInvestors Service says Coca-Cola Hellenic may need to borrow ahalf-billion euros ($640 million), about twice its net income inthe first nine months of 2012, and jeopardize its Baa1 rating.

“The change of headquarters is good for the company since itreduces the risk of higher taxes or nationalization, but itdeteriorates its liquidity position because of the costs,” saidRamon Nieto, a fund manager at Geroa EPSV Fondos in San Sebastian,Spain. The firm oversees 1.1 billion euros and used to holdCoca-Cola Hellenic's bonds. “Even with the recent increase in theyield, it's not attractive enough for us to buy them.”

The initial surge in the company's notes helped make them thebest-performing of 123 issues in Bank of America Merrill Lynch'sEuro Consumer Non-Cyclical, Food & Drug Retail, Pharma Index inOctober, returning 2 percent compared with an average 0.69 percent.The debt has lost 0.05 percent on average this month, one of onlytwo securities in the gauge to post a decline.

Under the plan, a new company called Coca-Cola HBC AG isoffering to buy Coca-Cola Hellenic shares on a one-for-one basis.If more than 90 percent of investors agree to the deal, the companycan start a buyout of the remaining stock either through a shareexchange or cash settlement.

Moody's estimates it may cost as much as 500 million euros ifall minority shareholders choose cash. That's more than twice the240 million euros of net profit the company said Nov. 8 that itmade in the nine months through September.

Debt Increase

Coca-Cola Hellenic has 1.8 billion euros of outstanding bonds,as well as a 500 million-euro undrawn credit facility that maturesin 2016, Bloomberg data show. The company said it also has a 550million-euro term loan which will only be used if it needs to buyout shareholders.

Chief Financial Officer Michalis Imellos said this month thatthe company plans to refinance debt in bond markets next year.

“We believe that more than 90 percent of our shareholders willtender into the exchange offer,” the company said in a statement.“Our shareholders understand and support the rationale of thistransaction and 61 percent of our shareholders have alreadycommitted or stated that they will tender their shares. Theattractiveness of a cash alternative of 13.58 euros will depend, toa significant extent, on our share price at the relevant time.” Thecompany's current share price is “significantly higher than thecash alternative,” it said.

An increase in debt could worsen the leverage ratio of Coca-ColaHBC beyond the guidelines the ratings company requires for itscurrent Baa1 grade, Yasmina Serghini-Douvin, an analyst at Moody's,wrote in a report last month.

Coca-Cola Hellenic's gross debt rose to 3.3 times earningsbefore interest, taxes, depreciation and amortization as of June30, from 3.1 times a year earlier, according to Moody's.

The negative outlook on the company, which is 23 percent ownedby Atlanta-based Coca-Cola Co., reflects concern that the group'sperformance “will remain vulnerable to the overall weak consumerenvironment in Europe and that this will continue to constrain itsmargins and credit metrics,” Moody's said.

The euro-area economy has been in a recession since the thirdquarter of 2011, when the shortest expansion since 1970 ended, theCentre for Economic Policy Research said Nov. 15.

Retail Sales

Retail sales in the 17-nation region fell 0.2 percent inSeptember, the European Union's statistics office said Nov. 7.

Consumer demand in Greece is even worse, with retail salesslumping 7.2 percent in August from a year earlier. The nation'sjobless rate surged to 25.5 percent as austerity measures linked tothe country's 240 billion-euro bailouts constrained growth.

Greece's economy contracted 6.3 percent in the second quarterfrom the same period last year.

Coca-Cola Hellenic, which has about 2,000 of its 41,900employees in Greece, has been based in Athens for the past 12 yearsafter being formed by a merger between Hellenic Bottling CompanyS.A. and London-based Coca-Cola Beverages. It operates in 28countries as varied as Ireland and Nigeria.

The company said Oct. 11 the move is intended “to improveCoca-Cola Hellenic's access to both the international equity anddebt capital markets and increase its flexibility in raising newfunds to support its operations and future growth.”

Coca-Cola Hellenic's decision to leave its home equity marketand switch its primary listing to London increases the chanceGreece will be demoted to an emerging market next year, MSCI Inc.said Oct. 25.

The index provider put Greece's stock market under review fordowngrade from developed status on June 20 and will make a finaldecision as part of its annual reclassification in June next year.The MSCI Greece Index consists of just two companies, with thebottler accounting for 75 percent by weight.

Coca-Cola Hellenic's 6.4 billion-euro market capitalizationwould qualify for a listing on London's benchmark FTSE 100 Index,according to data compiled by Bloomberg.

The company reported a 1 percent decline in net income in thethree months through September to 146.5 million euros, helped bysales in developing markets including Poland and Russia. Less than10 percent of earnings are made in Greece, Standard & Poor'ssaid in a Nov. 2 report.

Exit 'Risks'

If the move out of Greece isn't approved then a “multi- notchdowngrade could still be possible as a result of risks associatedwith Greece exiting the euro zone and the potential impact of Greekgovernment policies on Coca-Cola Hellenic's business and financialenvironment,” the ratings firm said. The company's BBB+ rating ison negative watch at S&P.

Coca-Cola Hellenic last issued debt in February 2011 when itsold its 4.25 percent bonds in euros due November 2016, accordingto data compiled by Bloomberg. Their yield, which is 232 basispoints more than the safest government debt, is almost double the133 basis-point spread on similar-maturity debt sold by Absolutvodka maker Pernod Ricard SA.

The company's share price has risen 32 percent this year to 17.5euros, data compiled by Bloomberg show. The stock fell as much as10 percent the day the exchange offer was announced.

“We view the new share structure as credit positive, removingtail risk, loosening the link between the company and problems inGreece and associated fear of contagion from a Greek euro exit inthe minds of investors,” Max Castle, an analyst at ING FinancialMarkets in Amsterdam, told clients in a note.

Coca-Cola Hellenic's net cash from operating activities fell to675 million euros at the end of September, from 711 million euros ayear earlier, its earnings statement shows. Free cash flow droppedto 381 million euros from 416 million euros.

“In principal the move the company is looking to make is on theright track — they have calculated the cost and it is amoving-forward plan,” said George Satlas, the Athens-based head ofinvestments at Mutual Funds of Postal Savings Bank and HellenicPost. “They've done quite a job in terms of profitability. Butthey're operating in a tough environment.”

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.