Fitch Rates Altria's $1 Billion Debt Issuances 'BBB+'
CHICAGO -- April 30, 2013
Fitch Ratings has assigned a 'BBB+' to Altria Group, Inc.'s (Altria) senior
unsecured notes issuances. The notes were issued in two tranches $350 million
2.95%, due May 2, 2023 and $650 million 4.5%, due May 2, 2043. The Rating
Outlook is Stable. At March 31, 2013, Altria had $13.9 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, however, the
company's has $1.4 billion 8.5% notes maturing in November 2013.
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 of
Copenhagen and Skoal.
Substantial Cash Flow Generation:
Altria's operations consistently generate large operating cash flows. For the
year ended Dec. 31, 2012, the company generated $3.9 billion of cash from
operations, which was higher than Fitch's forecast. 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 foot print will
continue to support its high margins.
Highly Stable Credit Measures:
Altria's leverage total debt-to-EBITDA was 1.9 times (x) for the year ended
Dec. 31 2012 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 6.6x for the year-ended compared to prior year
due to lower interest expense and higher earnings and funds from operations
(FFO) adjusted leverage was 2.9x for the period. These credit measures are
adequate for 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.
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 Dec. 31, 2012, Altria had $2.9 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 approximately $23 billion.
Dividends for the year ended 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 a new $300 million share repurchase program on
April 24, 2013 after the company completed its $1.5 billion authorization
during the first quarter of 2013.
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 budget proposal to increase excise taxes at the state
and federal levels, if enacted, have the potential to reduce volume, decrease
pricing flexibility and operating income at least in the near term.
Recent Operating Performance and Debt levels:
For the first quarter ended March 31, 2013, total revenues net of excise taxes
was flat at $3.9 billion. Net revenues for smokeable products declined 1% to
$3.4 billion due to lower volume of 5.3%, which was substantially offset by
pricing. Smokeless products revenues increased 3.1 % to $364 million. Total
operating income increased $510 million or 31.1% to $2.1 billion mainly due to
a $483 million credit received pursuant to a settlement of the
non-participating manufacturer (NPM) adjustment dispute. The NPM credit
reduced the company's 2012 MSA payment. As mentioned previously, Altria total
debt was $13.9 billion at March 31, 2013, unchanged from the year-end period.
Fitch anticipates that debt levels will grow in line with operating earnings
and cash flow growth.
Future development that may individually or collectively, lead to a positive
--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
--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';
UST LLC (a wholly owned subsidiary of Altria)
--Senior unsecured debt at 'BBB+'.
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
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