Coca-Cola Hellenic Bottling Co. SA bondholders are losing confidence in the firm's plan to leave Greece on concern the cost of the move will trigger a credit-rating downgrade for the nation's biggest company.

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

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

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

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

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

Moody's estimates it may cost as much as 500 million euros if all minority shareholders choose cash. That's more than twice the 240 million euros of net profit the company said Nov. 8 that it made 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 matures in 2016, Bloomberg data show. The company said it also has a 550 million-euro term loan which will only be used if it needs to buy out shareholders.

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

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

An increase in debt could worsen the leverage ratio of Coca-Cola HBC beyond the guidelines the ratings company requires for its current 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 earnings before interest, taxes, depreciation and amortization as of June 30, from 3.1 times a year earlier, according to Moody's.

The negative outlook on the company, which is 23 percent owned by Atlanta-based Coca-Cola Co., reflects concern that the group's performance “will remain vulnerable to the overall weak consumer environment in Europe and that this will continue to constrain its margins and credit metrics,” Moody's said.

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

Retail Sales

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

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

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

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

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

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

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

Coca-Cola Hellenic's 6.4 billion-euro market capitalization would 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 the three months through September to 146.5 million euros, helped by sales in developing markets including Poland and Russia. Less than 10 percent of earnings are made in Greece, Standard & Poor's said in a Nov. 2 report.

Exit 'Risks'

If the move out of Greece isn't approved then a “multi- notch downgrade could still be possible as a result of risks associated with Greece exiting the euro zone and the potential impact of Greek government policies on Coca-Cola Hellenic's business and financial environment,” the ratings firm said. The company's BBB+ rating is on negative watch at S&P.

Coca-Cola Hellenic last issued debt in February 2011 when it sold its 4.25 percent bonds in euros due November 2016, according to data compiled by Bloomberg. Their yield, which is 232 basis points more than the safest government debt, is almost double the 133 basis-point spread on similar-maturity debt sold by Absolut vodka maker Pernod Ricard SA.

The company's share price has risen 32 percent this year to 17.5 euros, data compiled by Bloomberg show. The stock fell as much as 10 percent the day the exchange offer was announced.

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

Coca-Cola Hellenic's net cash from operating activities fell to 675 million euros at the end of September, from 711 million euros a year earlier, its earnings statement shows. Free cash flow dropped to 381 million euros from 416 million euros.

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

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