House & Home
House and Home
House and Home
Thu, January 27, 2011
Fitch Affirms Altria's IDR at 'BBB+' on $1B Share Buyback Program
CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Altria Group, Inc. (Altria) (NYSE: MO) at 'BBB+' with a Stable Outlook after the company announced, concurrently with its earnings release today, a new $1 billion share repurchase program for 2011. This rating action affects approximately $12.2 billion of debt outstanding at Dec. 31, 2010. Fitch is assuming those share repurchases will be debt financed largely due to the demands placed on cash flow by Altria's dividend commitment. However, such debt financing would not be expected to increase leverage materially.
Altria's ratings reflect the company's continued ability to generate substantial cash flow from operations due to high operating margins, significant liquidity, and commanding market share position in the U.S. tobacco industry. The ratings further consider Altria's shareholder-friendly high target dividend payout ratio - increased last year to 80%. Altria's Philip Morris USA subsidiary has experienced volume declines but has been able to grow revenues due to pricing and continued inelasticity of demand. While Altria relies heavily upon cigarette sales, the company's ratings are supported by its diversification of operations within the tobacco space and the company's large stake in SABMiller plc (SABMiller), one of the world's largest brewers. Altria's ratings are lower than those of companies with similar credit profiles largely due to tobacco industry factors, including continued cigarette volume declines; ongoing, albeit reduced, litigation risk; and increasing regulatory risk.
A deceleration of cigarette volume declines or industry growth, or material diversification outside of the tobacco industry, would be positive for the company's ratings. Conversely, an unanticipated increase in volume declines or heightened litigation risk could place pressure on the ratings.
For the year ended Dec. 31, 2010, Altria's credit metrics are in line with Fitch's expectations. Total debt-to-operating EBITDA has declined to 1.8 times (x) from 1.9x for the year ended Dec. 31, 2009 as a result of growing EBITDA partially offset by a small increase in debt. Operating EBITDA-to-gross interest expense has risen to 5.9x from 5.1x over the same period due to increased EBITDA and lower interest expense. Excluding industry factors, leverage is lower than expected for the rating category. Coverage is in line with the rating category, and this is attributable to the relatively higher interest debt issued by Altria in late 2008 and early 2009 to fund its acquisition of UST Inc. Altria has significant financial flexibility due to its substantial operating cash flows. If total debt-to-EBITDA moves closer to the low 2.0x without a reasonable expectation for lower leverage going forward, a negative rating action is possible. Fitch would view that increase in leverage as Altria declining to use its financial flexibility to maintain its credit profile in line with its current rating.
Anticipating no substantial Federal Excise Tax increase or widespread large State Excise Tax increases in the near term, Fitch expects continued cigarette volume declines in the low- to mid-single digits in 2011. As a result, revenues are expected to increase in the low- to mid-single digit range. With continued cost improvements expected from Altria, overall operating income is forecast to increase in the mid- to high single-digit range. Credit metrics will therefore be stable given assumed debt-financed share repurchases.
Altria has ample liquidity. The company has undrawn facilities totaling $3 billion, comprised of a $600 million 364-day revolving facility expiring November 2011, and a $2.4 billion three-year revolving facility expiring November 2012, which are used to support commercial paper (CP) issuance. The company had no CP outstanding at Dec. 31, 2010. Altria had $2.3 billion of cash as of Dec. 31, 2010, resulting in an approximate liquidity position of $5.3 billion. Bolstering Altria's liquidity is the company's 27.1% share of SABMiller, valued at $15.1 billion at Dec. 31, 2010. The company's upcoming maturity schedule is manageable given the amount of cash generated by its operations.
The notes of UST Inc. are structurally superior to the notes and debentures issued by Altria Group, Inc. Given the notes in total are a small portion of total debt, Altria has not issued notes from UST since acquiring UST Inc. in January 2009, and the low risk of default at the 'BBB+' rating level, Fitch has chosen not to make a distinction in the ratings.
Fitch has affirmed the following ratings:
Altria
--Long-term Issuer Default Rating (IDR) at 'BBB+';
--Guaranteed bank credit facilities 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 Inc. (a wholly owned subsidiary of Altria):
--Senior unsecured debt at 'BBB+'.
The Rating Outlook is Stable.
Additional information is available at [ www.fitchratings.com ].
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated 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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