Fitch Rates Altria's $3.2B Debt Issuances 'BBB+'
CHICAGO -- October 28, 2013
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
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.
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.
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.
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 '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: Including Short-Term Ratings and Parent and
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Michael Zbinovec, +1-312-368-3164
70 W. Madison St.
Chicago, IL 60602
Wesley E. Moultrie II, CPA, +1-312-368-3186
David Peterson, +1-312-368-3177
Brian Bertsch, New York, +1 212-908-0549
Press spacebar to pause and continue. Press esc to stop.