Fitch assigns BBB+ rating to Altria's US$1B in senior unsecured notes issuances; outlook stable
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 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) 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
Fitch Ratings, Inc.
Wesley E. Moultrie II, CPA, +1-312-368-3186
Fitch Ratings, Inc.
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Carla Norfleet Taylor, CFA, +1-312-368-3195
David Peterson, +1-312-368-3177
Brian Bertsch, +1-212-908-0549
Source: Fitch Ratings
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