MOODY'S CONFIRMS A2 LONG-TERM AND PRIME-1 SHORT-TERM RATINGS OF BAT; RATING OUTLOOK REMAINS NEGATIVE.
New York, 02-17-98 -- Moody's Investors Service confirmed BAT Industries' A2 long-term and Prime-1 short-term rating. The confirmation reflects our expectation that BAT's strong position in the global tobacco market – particularly outside the U.S. – and its prudent financial strategy will enable the company to sustain appropriate debt protection measures despite the acquisition of Cigarerra La Moderna (CLM), and the divestiture of its large financial services operations. Notwithstanding the confirmation, Moody's rating outlook for BAT remains negative due to the uncertainty surrounding the proposed U.S. tobacco litigation settlement. A failure to consummate a settlement with provisions broadly in keeping with those that were proposed in June of 1997 -- particularly with respect to insulation from class action litigation -- could result in considerable pressure on BAT's rating. This confirmation concludes a review that was initiated on July 23, 1997 following the announcement of BAT's plan to acquire CLM; the review was continued on October 16, 1997 following the announcement of BAT's plan to demerge its financial services operations and to merge these with those of Zurich Insurance Company.
Ratings confirmed are:
BAT Industries plc: Loan stock rated A2 and counterparty rating of A2.
BAT Capital Corporation: Medium-term notes, euronotes, eurobonds, and notes rated A2, counterparty rating of A2, and Prime-1 commercial paper rating based on a BAT guarantee.
BAT International Finance plc: Eurobonds rated A2 and Prime-1 commercial paper rating based on a BAT guarantee, and counterparty rating of Baa1.
BAT Finance BV: Loan stock rated A2 based on BAT guarantee.
BAT is the world's second-largest international tobacco company behind Philip Morris. It has a global market share of almost 13%; over 60% of its œ1.5 billion in global tobacco operating income is generated outside of the U.S.; and, it is very well positioned to expand it earnings and share position in non-U.S. markets. As a result of this strong position in the global tobacco sector, BAT will remain highly cash generative.
Moody's expects that BAT will embrace a prudent financial management strategy. Maintaining a measured approach toward the payment of dividends and any other form of distributions to shareholders will be central to such a strategy. In combination with BAT's substantial cash flow, the company's balanced financial policies should enable it to fund a competitive dividend, to undertake moderate tactical acquisitions, and to maintain debt at appropriate levels. Consequently, we expect that debt protection measures -- particularly fixed charge coverage and ratios of cash flow to debt -- will become more supportive of the current rating level. BAT's financial flexibility is also enhanced by the considerable excess of market value over the carrying value of certain investments. For example, the company's 42% ownership position in Imasco Limited – one of Canada's leading tobacco, retailing, and financial services companies – has a carrying value of less than œ450 million but its market value is approximately œ2 billion.
BAT's $1.7 billion, debt-financed acquisition of CLM will represent a moderate negative for the company's debt protection measures during the near term. However, we believe that the transaction is strongly supportive of BAT's goal of profitably expanding its position in the global tobacco sector. The intermediate-term cash flow and return on investment contribution from CLM should be favorable.
BAT's financial services subsidiaries are expected to be demerged from its tobacco operations and to be merged with those of Zurich Insurance during the second half of 1998. These subsidiaries had paid a substantial annual dividend of around œ400 million to BAT. The receipt of this dividend had contributed to BAT's debt service capacity and had helped to fund the large dividend that BAT paid to its shareholders – over œ800 million in 1996. The loss of these proceeds will be mitigated by the following factors: 1) BAT's ongoing dividend payment to its shareholders should be significantly reduced subsequent to the demerger of the insurance operations; and, 2) because of the marginal capital base of the Farmers Exchanges and Eagle Star, BAT had faced the ongoing risk of having to make large capital investments to support these operations. Since 1992, BAT had made a total of œ600 million in such capital contributions and Moody's believed that there was the potential for further contributions.
BAT Industries plc is a leading tobacco products and consumer financial services company headquartered in London. Major financial services subsidiaries include Farmers Group, headquartered in California, and Eagle Star Life and General, headquartered in London.
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