CHICAGO, August 06 (Fitch) Fitch Ratings has assigned a ‘BBB+’ rating to Altria Group, Inc.’s (Altria) $2.8 billion senior unsecured notes, which were issue in two tranches: $1.9 billion 2.85% notes due 2022 and $900 million 4.25% notes due 2042. Fitch currently rates Altria’s debt as follows:
--Long-term Issuer Default Rating (IDR) at ‘BBB+';
--Guaranteed bank credit facility at ‘BBB+';
--Guaranteed senior unsecured debt at ‘BBB+';
--Short-term IDR at ‘F2’;
--Commercial paper (CP) at ‘F2.’
Philip Morris Capital Corp. (a wholly owned subsidiary of Altria)
--Long-term IDR at ‘BBB+';
--Short-term IDR at ‘F2’;
--CP at ‘F2’. UST LLC (a wholly owned subsidiary of Altria)
--Senior unsecured debt at ‘BBB+'.
The Rating Outlook is Stable. Altria had $13.7 billion of debt at June 30, 2012.
Debt Issuance and Tender Offer
Net proceeds from the issuance are expected to be used to fund the cash tender offer and the related premium for any of the company’s 9.7% $3.1 billion notes due 2018, 9.25% $2.2 billion notes due 2019, 9.95% $1.5 billion notes due 2038 and 10.2% $1.5 billion notes due 2039. The amount of each series that may be accepted for purchase will be determined in accordance with a first priority given to 9.7% notes due 2018 and the 9.25% notes due 2019, limited to the $2.8 billion tender cap. If the amount of the first level priority notes tendered is less than the tender cap, the 9.950% notes due 2038 and 10.2% notes due 2039 (second level priority notes) will be accepted with a purchase sublimit of $500 million. The tender offer is scheduled to expire Aug. 31, 2012. Altria has the right to increase or decrease the tender cap and/or the purchase sublimit. Net proceeds not immediately used will be invested in short-term, interest-bearing instruments. Fitch expects the net proceeds less the premium to be used to refinance the company’s debt and general corporate purposes.
The notes rank equal to the company existing and future senior unsecured indebtedness and are guaranteed by Philip Morris USA, Inc. (PM USA) the company’s wholly owned operating subsidiary. The guarantee will be released if PM USA consolidates or merge into Altria or any successor of Altria, if Altria or any successor consolidates or merges into PM USA or if the company’s long-term senior unsecured debt is rated ‘A’ by a rating agency.
The notes also have a provision which require the company to repurchase the notes at a purchase price of 101 plus accrued interest if there is a change of control concurrent with a ratings downgrade below investment grade by the rating agencies.
--Leading Market Share Position
Altria’s ratings are supported by the company’s leading market share of U.S. tobacco segments. Altria’s PM USA subsidiary’s Marlboro brand has an estimated market share of 42.6% and total cigarette market share of 49.7%. PM USA has maintained U.S. market share of about 50% for several years. Altria’s U.S. Smokeless Tobacco Com pany (USSTC) has roughly 55% U.S. market share in smokeless tobacco, driven by the two large brands of Copenhagen and Skoal.
--Substantial Cash Flow The ratings reflect that Altria’s operations consistently generate large cash flows. For the 12 months ended June 30, 2012 (LTM period). The company generated $3.1 billion of cash flow from operations (CFFO) down from the $3.6 billion in 2011. The reduction reflects a $456 million IRS payment for the disallowance of tax benefits resulting from leverage lease transactions by Philip Morris Capital Corp., which is winding down its operations and $514 million pension plan contribution. Altria’s healthy operating EBITDA margin, which was 40.5% for the LTM period, drive the company’s high operating cash flow to revenue ratio. Manufacturing optimization and cost reduction efforts and price increases has helped improve margins from 32.5% in 2008.
Altria has ample liquidity which Fitch expects will be maintained given the company’s CFFO. Altria maintains a significant cash position throughout the year to meet its annual Master Settlement Agreement payment. Bolstering Altria’s liquidity is the company’s 27% equity ownership of SABMiller plc, one of the world’s largest brewers, currently valued at roughly $19 billion.
Fitch recognizes Altria’s goal to return cash to shareholders in its ratings. The company’s target dividend payout ratio of 80% is high but typical for U.S. tobacco firms. Fitch believes Altria’s dividend reduces its flexibility since management teams are reluctant to reduce dividends in periods of operational weakness. Additionally, dividends in excess of CFFO have been funded periodically by incremental borrowings which can weaken the company’s credit profile.
--Industry Risk Factors
Altria’s ratings are lower than those of companies with similar credit metrics, largely due to industry factors of continued cigarette volume declines of 3% to 5%; increasing regulatory risk and ongoing, albeit reduced, litigation risk. Altria has historically been able to offset declining volumes with price increases to continue to grow cigarette revenue. Fitch would contemplate a negative rating action if Altria loses pricing power because cigarette consumers become more price sensitive.
Credit Measures, Expected Performance, Liquidity Debt Structure
Altria’s total debt-to-operating EBITDA of 2.0 times (x) for the LTM period is in line with Fitch’s expectations. Leverage has decreased slightly over the past year. Operating EBITDA to gross interest expense was 5.4x, substantially consistent with the year-end. FFO adjusted leverage increased to 3.2x from 2.9x at Dec. 31, 2011. FFO was negatively impacted by pension contributions and IRS payment previously discussed. Fitch expects credit metrics to be stable.
Fitch expects continued cigarette volume declines in the low- to mid-single digits to be offset by pricing in 2012. With continued cost improvements anticipated by Altria, overall operating income is forecast to increase in the low single-digit range.
As stated previously, Altria has ample liquidity. At June 30, 2012, the company had a $1.5 billion of cash and $3 billion, five-year revolving credit facility which was undrawn and expires on June 30, 2016. The credit facility is used for general corporate purposes and to support the company’s CP issuances. Altria did not have any CP issued at June 30, 2012. The credit agreement requires that Altria maintain (i) a ratio of debt to consolidated EBITDA of not more than 3.0 to 1.0 and (ii) a ratio of consolidated EBITDA to consolidated interest expense of not less than 4.0 to 1.0. These financial covenants were met for the period.
The notes of UST Inc. are structurally superior to the notes and debentures issued by Altria Group, Inc. Fitch has chosen not to make a distinction in the ratings given the notes in total are a small portion of total debt and the low risk of default at the ‘BBB+’ rating level. Altria has not issued notes from its UST subsidiary since acquiring UST Inc. in January 2009.
What Could Trigger A Rating Action?
Future developments that may, individually or collectively, lead to a positive rating action include:
--An upgrade is not likely as upside to credit protection measures is limited by Altria’s reliance on the mature to declining cigarette sector, which inhibits growth potential;
--Altria’s focus on returning cash to shareholders signals stable to rising debt levels, which would not be consistent with an upgrade;
--A deceleration of cigarette volume declines, industry growth, or material diversification outside of the tobacco industry, would be positive for the company’s ratings.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Shareholder friendly actions; such as, a large debt-financed share buyback or acquisition would be credit-negative;
--An increase in leverage to the low 2.0x range without a reasonable expectation for lower leverage going forward would result in a negative rating action.
--Altria declining to maintain its credit profile through the use of its financial flexibility would be viewed negatively.