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Rating Action:

MOODY'S UPGRADES CONSOLIDATED CIGAR'S SUBORDINATED RATING TO B2; PLACES MAFCO WORLDWIDE'S SUBORDINATED RATING UNDER REVIEW FOR UPGRADE

02 Oct 1996
MOODY'S UPGRADES CONSOLIDATED CIGAR'S SUBORDINATED RATING TO B2; PLACES MAFCO WORLDWIDE'S SUBORDINATED RATING UNDER REVIEW FOR UPGRADE New York, 10-02-96 -- Moody's Investors Service upgraded Consolidated Cigar Corporation's senior subordinated debt issue to B2 from B3. At the same time, Moody's placed the B3 subordinated debt rating of an affiliate, Mafco Worldwide Corp. (Flavors), under review for possible upgrade. The review is prompted by the continued good operating results of Flavors, offset by the uncertainty associated with the potential sale of the company to Power Control Technologies, an entity 36% owned by MacAndrews & Forbes.
The Consolidated Cigar upgrade reflects the company's recent strong operating performance and impressive returns stemming from its good market position and the resurgence in the popularity of cigars. The rating is also supported by restricted payments and indebtedness tests per the note indenture that limit the amount of upstreamable funds and debt incurrence of at least two times cash flow interest coverage. However, the new rating continues to reflect uncertainties regarding the duration of the current cigar boom, in light of the long-term historical downtrend in cigar consumption; the company's exposure to general tobacco industry risks; and the parent company's financial aggressiveness.
After decades of decline, the US cigar industry has been experiencing a resurgence, attributable to the growth of cigar-themed events, the promotion of cigar smoking by celebrities, and the highly successful launch of a new magazine, Cigar Aficionado. Total U.S. cigar consumption has increased 16% from an all time low of 3.42 billion units in 1993 to almost 4 billion units in 1995, following a 20-year downtrend. Large cigars, comprising over 90% of the industry dollar sales, peaked at 9 billion units in 1964 and fell steadily thereafter, at about 5% per year, until 1993. Since then volume has grown 20% through 1995. Premium cigar segment, which had long been an exception to the negative trend, has seen its sales accelerate to a double digit growth rate since 1992.
As the largest cigar company in the U.S., Consolidated Cigar (Cigars) has been a major beneficiary of the resurgence, posting strong earnings growth. In the June 1996 quarter, operating income surged almost 50%. Though capital expenditures are rising to meet the ballooning backlogs, free cash flow remains strong and dividends have increased.
In Moody's view, it remains uncertain how long this boom will last, given its faddish characteristics. Moreover, the social, political, and cultural backlash against smoking will likely affect cigars also in the long run.
Meanwhile, the company's ultimate parent, MacAndrews & Forbes, continues to seek maximum leveraging opportunities with their investments. The recent initial public offering (IPO) of Consolidated Cigar Holdings Inc. (Holdings), Cigars' immediate holding company, raised $128 million in net proceeds, all of which were upstreamed as a dividend and not reinvested in the company. The IPO was also conducted in conjunction with an issuance of $70 million in promissory notes by Holdings to Mafco Consolidated Group, Holdings' parent company, depleting Holdings equity to a $12 million deficit.
Consolidated Cigar Corporation, based in Fort Lauderdale, FL, is engaged in the production and sale of cigars, pipe tobacco, and other tobacco related products. Mafco Worldwide Corp., based in Camden, NJ, is the world's leading producer of licorice extract used principally in the tobacco industry. Both companies are indirect wholly-owned subsidiaries of Mafco Consolidated Group, which in turn is controlled by MacAndrews & Forbes.
No Related Data.
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