Fitch: SCHIP Legislation to Pressure U.S. Tobacco Credit Metrics

CHICAGO--(Business Wire)--
Yesterday's U.S. Senate-approved expansion of the State Children's Health
Insurance Program (SCHIP) will lead to excise tax increases that will negatively
impact cigarette volumes, according to Fitch Ratings.

The U.S. Senate passed legislation to expand the SCHIP, which will be funded by
a 61 cent per pack increase in the federal cigarette excise tax. Fitch expects
the legislation to be signed into law by President Obama, after differences
between the House and Senate bills are reconciled. The new cigarette federal
excise tax amounts to a 156% increase over the current federal excise tax of 39
cents per pack, bringing the total federal excise tax for a pack of cigarettes
to $1.

The Congressional Budget Office (CBO), relying on a variety of research sources,
estimates volume declines of 2.5% to 5% for every 10% increase in cigarette
prices. Based on the Fitch estimate of an average retail price of $4.45 per pack
of cigarettes, all other factors being equal, a 61 cent increase in the federal
cigarette excise tax would produce a volume decline of approximately 3.5% to 7%.

'While tobacco products are relatively price inelastic, they are not perfectly
inelastic,' said Senior Director Wesley E. Moultrie II. 'As a result, near-term
revenue and operating income growth may be negatively impacted, leading to
weaker credit measures.'

Although large volume declines have the ability to disrupt tobacco companies'
operating results near-term and excise tax increases limit companies' pricing
flexibility, tobacco industry participants have overcome large retail price
increases in the past. Due to cigarettes being relatively price inelastic, to
shore up revenues, tobacco companies can raise prices to offset volume declines
as a result of excise tax increases. In recent years, larger tobacco companies
have diversified their tobacco product portfolios. Reynolds American Inc. (RAI)
purchased smokeless tobacco manufacturer Conwood in 2006, and Altria Group, Inc.
(Altria) purchased John Middleton Co., a large manufactured-cigar maker, in 2007
and UST Inc., the largest smokeless tobacco manufacturer, earlier this month.

'Though RAI and Altria still rely primarily on cigarette sales, the growth in
the companies' other tobacco segments partially offset volume declines in their
cigarette sales,' said Associate Director Christopher M. Collins.

With cigarette volumes decreasing as a result of the increase in the federal
cigarette excise tax, state cigarette excise tax revenues will consequently
fall. A number of states have dedicated programs funded by their own cigarette
excise taxes meaning states will have to cut their dedicated programs or
increase their state cigarette excise taxes. In addition states' budgets are
facing record shortfalls; some 45 states are projecting budget deficits for
fiscal year 2009 and/or 2010. So-called "sin taxes", taxes on tobacco and
alcohol, will be popular revenue sources for state governments looking to
somewhat offset revenue shortfalls. While tax increases are unpopular, these
taxes typically meet little political resistance for a variety of reasons
ranging from health policy to moral issues. A number of states' government
officials have already proposed increasing cigarette excise taxes, including
Virginia, Florida, Oregon, and Kentucky, among others. Fitch expects more states
to consider excise tax increases as budget shortfalls become more severe.

Fitch's ratings for Altria and its subsidiaries are as follows:

Altria

--IDR 'BBB+';

--Guaranteed bank credit facilities 'BBB+';

--Guaranteed senior unsecured debt 'BBB+';

--Short-term IDR 'F2'

--Commercial paper (CP) 'F2'.

Philip Morris Capital Corp.

--IDR 'BBB+';

--Senior unsecured debt 'BBB+';

--Short-term IDR 'F2';

--CP 'F2'.

UST Inc.

--Senior unsecured debt 'BBB+'.

The Rating Outlook is Stable.

Fitch's ratings for Reynolds American Inc. (RAI) and its subsidiary are as
follows:

RAI

--IDR 'BBB-';

--Guaranteed bank credit facility 'BBB-';

--Guaranteed notes 'BBB-'.

R. J. Reynolds Tobacco Holdings Inc.

--IDR 'BBB-';

--Senior unsecured notes 'BBB-';

--Guaranteed unsecured notes 'BBB-'.

The Rating Outlook is Stable.

Additional information can be found in Fitch's Nov. 18, 2008 press release,
'Fitch 2009 U.S. Tobacco Outlook: Higher Taxes to Further Pressure Cigarette
Volumes', available at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on
the agency's public site, www.fitchratings.com. Published ratings, criteria and
methodologies are available from this site, at all times. Fitch's code of
conduct, confidentiality, conflicts of interest, affiliate firewall, compliance
and other relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings
Christopher M. Collins, +1-312-368-3196, Chicago
Wesley E. Moultrie II, CPA, +1-312-368-3186, Chicago
Media Relations:
Cindy Stoller, +1-212-908-0526, New York
cindy.stoller@fitchratings.com

Copyright Business Wire 2009