Fitch Affirms Reynolds American's IDR at 'BBB-'; Outlook Stable

Source from:  Business Wire 06/29/2009

Fitch Ratings has affirmed the ratings of Reynolds American Inc. (NYSE: RAI) and R. J. Reynolds Tobacco Holdings, Inc., a wholly owned subsidiary of RAI, as follows: Reynolds American Inc. --Long-term Issuer Default Rating (IDR) at 'BBB-'; --Guaranteed bank credit facility at 'BBB-'; --Guaranteed notes at 'BBB-'. R. J. Reynolds Tobacco Holdings, Inc. --IDR at 'BBB-'; --Senior unsecured notes at 'BBB-'; --Guaranteed unsecured notes at 'BBB-'. The Rating Outlook is Stable. This rating action affects approximately $4.7 billion of debt outstanding on March 31, 2009. The affirmation reflects RAI's continued ability to generate substantial cash flow from operations due to its high operating margins, its significant levels of liquidity, and its prominent market position as the second largest U.S. tobacco company. The ratings further consider RAI's shareholder friendly high dividend payout ratio - currently at 75%. The company's losses in market share due to volume declines greater than industry average driven by outsize losses in non-growth brands are somewhat counterbalanced by the company's operational diversification attributable to its growing smokeless tobacco division Conwood. The company's ratings are lower than companies with similar credit profiles largely due to industry factors including continued and potentially accelerating volume declines and ongoing, albeit reduced, litigation risk. For the 12 months ended March 31, 2009, the company's credit statistics were in line with Fitch's expectations. Total debt-to-operating earnings before interest, taxes, depreciation and amortization (EBITDA) was 1.8 times (x) compared to 1.8x on Dec. 31, 2008 and Dec. 31, 2007. RAI's operating EBITDA-to-gross interest edged up to 9.9x from 9.5x on Dec. 31, 2008 and 7.4x on Dec. 31, 2007 due to floating rate interest debt and floating rate swaps. RAI's liquidity remained substantial with a cash balance of $3.2 billion on March 31, 2009, of which a large portion, amounting to $2.1 billion due April 2009, was held for its annual Master Settlement Agreement (MSA) payment. The company's liquidity position is bolstered by $538 million of availability under its $550 million revolving credit facility, which expires June 2012. Following the first quarter reporting period, the company's RJR Tobacco subsidiary withheld $406 million as a disputed portion of its $2.1 billion MSA obligation, which is allowed under the agreement. The disputed portion will remain a liability until the dispute is settled per the terms of the MSA. In May, $200 million in notes matured, which RAI paid from its cash balance. RAI's next maturity is not until July 2010. The Family Smoking Prevention and Tobacco Control Act was signed by the President on June 22, 2009. The legislation provides a framework for Food and Drug Administration (FDA) regulation of the industry. While more restrictive advertising and labeling standards are expected, Fitch expects the legislation to have minimal near-term impact on the industry's larger players such as RAI, due to their established brands. For a more in-depth analysis of the effects of FDA regulation, see the special report, 'FDA Regulation Revisited: Anticipated Effects of FDA Oversight of Tobacco,' available on the Fitch Ratings web site at www.fitchratings.com. With close to $9 billion in net revenue in 2008, RAI is the second largest tobacco firm in the United States. RAI has engaged in a number of transactions to become the company it is today. RAI's R. J. Reynolds (RJR) subsidiary manufactures and markets cigarettes, and it has the second largest market share in the United States, with approximately 28%. RJR's leading brands, Camel, Kool, Pall Mall, Winston, and Doral, are five of the top 10 leading brands in the United States. While RJR has been experiencing declining volumes for the past several years, RAI's moist-snuff subsidiary, Conwood, is experiencing moderate growth. It participates in both the premium and value sectors of moist-snuff market. Conwood's Kodiak brand, its largest premium brand, has roughly 4% of total market share. Conwood's Grizzly brand, its largest value brand and the category's leading brand, has around 25% market share. Due to Conwood's Grizzly brand, Conwood has the largest market share in the value category, the fastest growing moist-snuff segment. Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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. Enditem