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Fitch Places Fortune Brands' 'BBB-' IDR on Rating Watch Evolving

^{Published on 2010-12-09 09:50:36 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has placed the ratings of Fortune Brands, Inc. (NYSE: FO) on Rating Watch Evolving following the company's announcement today that it plans to separate the company's three businesses - distilled spirits, home and security, and golf products.

Fitch currently rates Fortune Brands as follows:

Fortune Brands, Inc.

--Issuer Default Rating (IDR) 'BBB-';

--Short-Term IDR 'F3';

--Commercial Paper 'F3';

--Revolving Credit Facilities 'BBB-';

--Senior Unsecured Notes and Debentures 'BBB-'.

Fortune Brands, Inc., the primary issuer of the company's debt, is expected to consist solely of its spirits business. The distilled spirits business will continue to carry the Fortune Brands name and is expected to bear much of the existing debt. The home and security business is expected to be separated and spun off to shareholders, and the golf business is expected to be sold or spun off. The detailed plans for the separation of the businesses will be finalized within the next several months.

The Rating Watch Evolving indicates that the ratings may be upgraded, downgraded or affirmed. The company's ratings will depend upon the amount and use of any proceeds from the divestitures of the golf and home and security businesses to reduce debt. While there is less diversification, Fitch acknowledges that the stable spirits business has underpinned the company's performance and supported the ratings when the home and security business came under severe pressure in the recent housing downturn. Furthermore, the spirits business generates most of the cash flow from operations, and the spirits business is expected to grow.

In order for the company to maintain its ratings and possibly achieve an upgrade, a substantial portion of any proceeds would need to be used for debt reduction. If there is no debt reduction or debt reduction fails to achieve credit measures commensurate with an investment grade distilled spirits company, a negative rating action is possible. Under Fitch's policies and procedures, the Rating Watch is expected to be resolved within six months. Fitch expects Fortune Brands' management to have a detailed separation plan within that time frame that will be reviewed to resolve the Rating Watch Evolving. Fitch does not expect that Fortune Brands would require a waiver from debt holders due to any covenants such as substantial asset sales provision in the bank credit facility or bond indenture. However, the separation plan would be subject to board authorization and customary regulatory approvals.

Fortune Brands currently has adequate liquidity with cash and equivalents of $671 million and no borrowings under its $750 million three-year committed revolving credit agreement at Sept. 30, 2010. While Fitch expects a significant portion of cash to be used for the repayment of Fortune Brands' January 2011 maturity of approximately $590 million of 5 1/8% senior unsecured notes, the company's liquidity will remain adequate. The credit facility contains a minimum consolidated interest coverage covenant requiring a coverage ratio of 3.0 times (x) through 2011 and 3.5x through 2012. The company has meaningful room under the covenant as EBITDA to gross interest was 5.0x as of the latest 12 months ended Sept. 30, 2010. The company's total debt to EBITDA was 4.0x for the same period, which is high for the current rating, but Fitch had expected leverage to be closer to 3.5x mid-year 2011. Fortune Brands has historically generated considerable free cash flow. Free cash flow rebounded in 2009 to $557 million after suffering a decline of $70 million to $380 million in 2008. Changes in working capital and a dividend cut provided the boost to free cash flow. A 57% cut in the dividend in mid-2009 benefited free cash flow by approximately $110 million in 2009 and is estimated to further benefit free cash flow by $40 million in 2010 versus 2009.

Additional information is available at '[ www.fitchratings.com ]'

Applicable criteria and related research:

--Corporate Rating Methodology (Aug. 16, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

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