Fitch Affirms Altria's Debt Ratings at 'BBB+/F2'
Fitch Ratings has affirmed Altria's ratings 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 $13.9 billion of debt at Sept 30, 2012.
Superior Market Share Positions:
Altria Group, Inc.'s (Altria) ratings are supported by the company's commanding market share positions in the U.S. tobacco industry. The company's Philip Morris USA, Inc. (PM USA) subsidiary has held about 50% share of the total cigarette market for several years while its Marlboro brand currently has an estimated 42.6% market share. Altria's U.S. Smokeless Tobacco Company (USSTC) has roughly a 55% share of the smokeless market, driven by the two large brands of Copenhagen and Skoal.
Substantial Cash Flow Generation:
Altria's operations consistently generate large operating cash flows. For the LTM ended Sept. 30, 2012, the company generated $3.2 billion of cash from operations, which was in line with Fitch's forecast. Altria's healthy operating EBITDA margins 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 foot print will continue to support its margins.
Credit Metrics Meet Expectations:
Fitch estimates that total debt-to-EBITDA to be at approximately 2.0 times (x) for 2012 which is in line with Altria's LTM ratio for the period ended Sept. 30, 2012. Leverage is up slightly over the past two years as debt levels increased to finance the company's share repurchases and other items discussed in recent Operating Performance/Debt levels and Cash Flow Utilization section below. Gross interest coverage was 5.5x for the LTM period similar to the prior year end period and FFO adjusted leverage was 3.4x. These credit measures are adequate for rating given the industry factors (discussed below) and they are expected to remain stable within the near-term due mainly to EBITDA growth, as debt levels are expected to continuing rising at a moderate pace and any excess cash flow is likely to be used for share repurchases.
Altria has ample internally generated liquidity which Fitch expects will be maintained given the company's high levels of CFFO. External liquidity is provided by the company's five-year revolving credit facility that expires June 2016. At Sept. 30, 2012 Altria had $2.2 billion of cash and full revolver availability of $3.0 billion. Significantly bolstering Altria's liquidity is the company's 27.1% share of SABMiller plc, one of the world's largest brewers, currently valued at approximately $20 billion.
Dividends for the LTM period ended Sept. 30, 2012 was $3.4 billion. The company's target dividend payout ratio of 80% is high, but typical for U.S. tobacco firms. Altria's Board of Directors authorized an expansion of its share repurchase program from $1.0 billion to $1.5 billion on October 23, 2012. The company had $550 million remaining under the expanded program, which it expects to complete by June 30, 2013. As of Sept. 30, 2012 Altria repurchased 31.4 million shares of its common stock under the program at an aggregate cost of approximately $950 million. Net spending on share repurchases was $922 million for the LTM period ending Sept 30.
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 digits cigarette volume declines; ongoing, albeit reduced, litigation risk; and regulatory risk.
Recent Operating Performance/Debt levels and Cash flow Utilization:
For the nine months ended Sept.30 total revenues increased 6.2% to $13.04 billion due mainly to Philip Morris Capital Corp., which while winding down its operations incurred a pre-tax operating charge of $490 million in the prior year period. The charge reduced revenue and operating income. Net revenues for smokeable products increased 1.6% to $11.38 billion resulting from price increases and greater market share, substantially offset by volume declines. Smokeless products revenues increased 2.8 % to $1.16 billion. Total operating income increased $776 million or 16.5% to $5.5 billion mainly due to due to financial services lapping the prior year charge and improved profitability on cigarettes due to the success of the company's cost saving programs.
Altria total debt was $13.8 billion at Sept. 30, 2012 up $1.68 billion from $12.19 billion at Dec. 31, 2010. Altria's high dividend payout ratio coupled with shares repurchases, pension contributions and tax payments for PMCC's leverage lease transactions has resulted in incremental borrowing. Fitch does not expect future material cash charges from Philip Morris Capital Corp. as the company signed a closing agreement with the IRS that resolved the outstanding issues. Furthermore pension contributions are not expected to result in incremental borrowing in the near-term either. Nonetheless, Fitch anticipates that debt levels will grow in line with operating earnings and cash flow growth.
GUIDANCE FOR FURTHER RATING ACTIONS
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) alarge debt-financed acquisition without meaningful EBITDA and cash flow contribution; (iii) a large debt-financed share repurchase moving leverage beyond the mid-2.0x
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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