CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Altria Group, Inc.'s (Altria) proposed senior unsecured notes issuance. A total of $1 billion in notes are being issued with a maturity date in 2020. The Rating Outlook is Stable. At Sept. 30, 2014, Altria had approximately $14 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.
KEY RATING DRIVERS
Market Leading Positions
Altria maintains leadership in the U.S. cigarette market with its Marlboro franchise, and leading positions in moist smokeless tobacco (MST) with its Copenhagen brand and in tipped cigars with Black & Mild. PM USA, the company's cigarette manufacturing subsidiary, commands around one-half of the U.S. marketplace bolstered by Marlboro's nearly 44% share. The company's MST offerings, Copenhagen and Skoal, also represent about one-half of the domestic MST market on a combined basis. Fitch believes that Altria's key smokeable and smokeless brands can hold current market share given no meaningful market disruption anticipated over the ratings horizon.
Accelerating Secular Volume Decline
The U.S. marketplace for tobacco cigarettes continues to dwindle by the mid-single digits annually as the smoking population declines (adults that smoked fell to record low of 18% of the U.S. population in 2013). Cigarette consumption in the U.S. has fallen by compound annual rate of 2.5% through 2012 since peaking at 640 billion sticks in 1981.
Altria, with around one-half of the U.S. marketplace, is most at risk in the industry by the secular volume declines. The company maintains some diversification across its product portfolio with smoking alternatives and wine; however, the smokeable tobacco business represents around 86% of revenues and earnings. Altria's ability to achieve net price realization has kept net revenues positive in the smokeable segment despite the volume pressure. Reversal of positive price realization for tobacco products in the absence of a viable source of profitability outside of the tobacco category would have negative consequences for Altria's ratings.
Steady Leverage Despite Volume Pressure
Altria's gross debt leverage (total debt to EBITDA) has been in the range of 1.8x to 2.1x since 2008 and was 1.81x for the LTM ending Sept. 30, 2014 and 1.89x in 2013, both measures slightly better than Fitch's expectations due to stronger EBITDA growth and a lower debt load. Altria defended margins from the volume declines by controlling operating costs (mainly cigarette infrastructure), having completed two cost savings programs over the past few years. EBITDA margins have expanded because of the cost initiatives to 43.6% for the LTM ending Sept. 30, 2014 from 39.3% in 2011. Fitch expects the current leverage level will be sustained through the long-term absent leveraging transactions.
SABMiller Stake Supports Strong Liquidity
Significantly bolstering Altria's liquidity is the company's 26.8% share of SABMiller plc., currently valued at $24 billion. Internal liquidity provided by operating cash flow (OCF) is strong at $4.58 billion for the LTM period ending Sept. 30, 2014 and $4.38 billion in 2013. OCF has covered large dividends payments and modest capital spending since 2008, excluding 2010, yielding positive free cash flow with margins fluctuating in the 1% to 4% range during this time.
Altria also had cash of $2.2 billion and full availability under a recently extended $3 billion five-year revolver (due August 2019) at Sept. 30, 2014. Excess liquidity is important given Altria's annual payment in April to the Master Settlement Agreement (MSA) that is approximately $4 billion. Debt maturities over the rating horizon are manageable, including $1 billion of unsecured notes due in 2015, given the company's solid liquidity.
Financial strategy emphasizes heavy shareholder returns:
Limited acquisition opportunities and light capital spending (at or below 1%) affords Altria the flexibility to return significant cash flows to shareholders via large dividend payments and aggressive share repurchasing. Fitch expects the same shareholder-friendly posture through the ratings horizon including dividend payouts around 80% that has led to payments for the LTM ended Sept. 30, 2014 totaling $3.82 billion.
Share repurchases significantly increased to more than $1 billion in 2011 and 2012 but moderated in 2013 to $634 million. The company already purchased over $679 billion in shares through the first nine months of 2014. Fitch sees the strategy as manageable at current cash flows and with leverage (total debt to EBITDA) sustained around 2.0x.
Industry factors limit ratings upside
Positive action to current credit ratings is restrained by key factors in the mature industry, specifically secular volume declines, high litigation exposure, rising regulatory risks and an accommodative shareholder stance.
RATING SENSITIVITIES
Future developments that may individually or collectively, lead to a positive rating action:
--Mitigation of negative industry factors with an emphasis on the slowing or reversal of secular volume declines;
--Altria fully offsetting cigarette volume pressures with meaningful portfolio diversification;
--Significantly reducing litigation risk, most notably the Engle progeny exposure;
--A commitment to a conservative financial strategy demonstrated by lower dividend payouts and less-aggressive share repurchasing.
Future developments that may individually or collectively, lead to a negative rating action:
--Altria has some flexibility to accommodate a more aggressive shareholder-friendly stance or acquisition activity, but gross leverage approaching 2.5x would warrant a one-notch downgrade;
--EBITDA pressures arising from greater-than-expected market contraction resulting from accelerated volume declines or a heightened competitive environment, such that gross leverage rises and stays around 2.5x;
--Regulatory decisions immediately banning sale of mentholated cigarettes or meaningfully increasing excise taxes on smoking products that significantly further suppresses volume and demand;
--Dramatic changes in the litigation process, whereby legal cases may reach verdict quicker and/or material adverse judgments significantly increase.
ALTRIA'S RATINGS
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'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=920035
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