Fitch Rates Altria's $3.2B Debt Issuances 'BBB+'

Mon Oct 28, 2013 4:47pm EDT

(The following statement was released by the rating agency) CHICAGO, October 28 (Fitch) Fitch Ratings has assigned a 'BBB+' rating to Altria Group, Inc.'s (Altria) senior unsecured notes issuances. The notes are being issued in two tranches with $1.4 billion due in 2024 and $1.8 billion due in 2044. The Rating Outlook is Stable. At Sept. 30, 2013, Altria had approximately $14.9 billion of total debt. The senior unsecured notes will rank equal to Altria's other existing and future senior unsecured indebtedness. The notes will be guaranteed by Philip Morris USA Inc. (PM USA), Altria's wholly owned subsidiary and subject to a Change of Control provision, whereby the company will be required to make an offer to purchase the notes at 101% plus accrued and unpaid interest upon a change of control and a downgrade below investment grade. Net proceeds from the offering will be used for general corporate purposes, including the tender offer to repurchase $2 billion of debt. KEY RATING DRIVERS Superior Market Share Positions: Altria's ratings are supported by the company's commanding market share positions in the U.S. tobacco industry. The company's PM USA subsidiary has held about 50% share of the total cigarette market for several years while its Marlboro brand currently has an estimated 43.6% market share. Altria's U.S. Smokeless Tobacco Company (USSTC) and PM USA smokeless tobacco products have roughly a 55% share of the smokeless market, driven by the two large brands, Copenhagen and Skoal. Substantial Cash Flow Generation: Altria's operations consistently generate large operating cash flows. For the LTM ended June 30, 2013, the company generated $4.6 billion of cash from operations, which is exceeding Fitch's expectations. Pricing and cost management continues to support Altria's healthy operating EBITDA margin, which exceeds 40% and drives its high operating cash flow to revenue ratio. Fitch anticipates that pricing and cost savings from the company's periodic rationalization of manufacturing, distribution and marketing footprint will continue to support its high margins. Highly Stable Credit Measures: Altria's leverage total debt-to-EBITDA was 1.97x for the LTM ended June 30, 2013, which was slightly lower than Fitch had forecasted. The company leverage ratio has ranged from 1.8x-2.1x for the past three years. Gross interest coverage improved to 7.6x for the LTM ended June 30, 2013 compared to prior year due to lower interest expense and higher earnings. Funds from operations (FFO) adjusted leverage was 2.8x for the same period. These credit measures are adequate for the rating given the industry factors (discussed below) and they are expected to remain stable as debt levels are balanced with EBITDA growth. Fitch anticipates that any excess cash flow is likely to be returned to shareholders through dividends and share repurchases. Significant Liquidity: Altria has ample internally generated liquidity that Fitch expects will be maintained given the company's high levels of cash flow from operations. External liquidity is provided by the company's five-year revolving credit facility that expires June 2016. At Sept. 30, 2013, Altria had $4.2 billion of cash and full revolver availability of $3 billion. Tobacco firms typically accumulate cash throughout the year to make their annual Master Settlement Agreement (MSA). Altria made its $3.1 billion MSA payment on April 15, 2013. Significantly bolstering Altria's liquidity is the company's 26.8% share of SABMiller plc., one of the world's largest brewers, currently valued at more than $20 billion. Shareholders Prioritized: Dividends for the LTM ended June 30, 2013 totaled $3.5 billion. The company's target dividend payout ratio of 80% is high, but typical for U.S. tobacco firms. In August, Altria's Board of Directors increased the $300 million share repurchase program to $1 billion, of which $709 million remained at the end of the third quarter, accounting for repurchasing activities during the year. Industry Factors Limit Ratings: Altria's ratings are lower than those of companies with similar credit metrics, largely due to industry factors of continued annual mid-single-digit cigarette volume declines; ongoing, albeit reduced, litigation risk; and regulatory risk. Recent budget proposals to increase excise taxes at the state and federal levels, if enacted, have the potential to reduce volume, and decrease pricing flexibility and operating income at least in the near term. Recent Operating Performance and Debt levels: For the third quarter ended Sept. 30, 2013, total revenues net of excise taxes increased 6.6% to $4.76 billion from the same period in 2012. Net revenues for smokeable products rose 4.6% to $4.1 billion due to increased volume of 1.2% and favorable pricing. Smokeless products net revenues jumped 9.8% to $448 million. Total operating income for the third quarter grew faster than revenues at 8.3%. As mentioned previously, Altria total debt was $14.9 billion at Sept. 30, 2013, rising $1 billion from the end of 2012, with debt leverage remaining commensurate with the rating. RATING SENSITIVITIES Future development that may individually or collectively, lead to a positive rating action: --Deceleration of industry volume declines or volume growth; --Continue moderation of litigation risk; --Significant diversification; or --Demonstrated commitment to more conservative financial policies related to dividends and share repurchases. Future development that may individually or collectively, lead to a negative rating action: --Increased litigation risks similar to those experienced in early 2000s, which was marked by material adverse judgment(s), prompting renewed legal scrutiny in multiple jurisdictions; --Significant increase of leverage due to (i) material declines in EBITDA resulting from volume and/or margin contraction, possibly due to heightened competition; (ii) a large debt-financed acquisition without meaningful EBITDA and cash flow contribution; (iii) a large debt-financed share repurchase moving leverage beyond the mid-2.0x. Fitch currently rates Altria debt as follows: Altria Group Inc. (Parent) --Long-term Issuer Default Rating (IDR) 'BBB+'; --Guaranteed bank credit facility 'BBB+'; --Guaranteed senior unsecured debt 'BBB+'; --Short-term IDR 'F2'; --Commercial paper (CP) 'F2.' Philip Morris Capital Corp. (a wholly owned subsidiary of Altria) --Long-term IDR 'BBB+'; --Short-term IDR 'F2'; --CP 'F2'. UST LLC (a wholly owned subsidiary of Altria) --Senior unsecured debt 'BBB+'. Contact: Primary Analyst Michael Zbinovec Senior Director +1-312-368-3164 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Wesley E. Moultrie II, CPA Managing Director +1-312-368-3186 Committee Chairperson David Peterson Senior Director +1-312-368-3177 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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