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Announcement:

Moody's changes BAT's ratings outlook to positive; the Baa1/P-2 ratings are affirmed

22 Mar 2012

Approximately USD14.9 billion of rated debt affected

Milan, March 22, 2012 -- Moody's Investor Service has today affirmed the Baa1 / P-2 long-term and short-term ratings of British American Tobacco plc (BAT or the company) and of its guaranteed subsidiaries. The outlook on all ratings has been changed to positive.

RATINGS RATIONALE

"Today's change in outlook reflects the company's improvements in operating performances and strengthened business profile over recent years and our expectations that, despite an increase in its share buyback programme, the company will maintain relatively strong credit metrics going forward," says Paolo Leschiutta, a Moody's Vice President -- Senior Credit Officer and lead analyst for BAT. "BAT's reported financial leverage of 1.9x, measured as debt to EBITDA as adjusted by Moody's, and a retained cash flow (RCF) to net debt of 19.2%, on a preliminary basis for the fiscal year-ending (FYE) December 2011, and we would expect similar levels going forward" continued Mr. Leschiutta.

BAT's ratings are supported by a combination of a strong business profile and credit metrics that compensate for (i) aggressive returns to shareholders; and (ii) what Moody's perceives as a moderate degree of litigation risk. The rating agency believes that BAT's current broad geographic diversification, extensive portfolio of brands, and leadership position in a variety of markets as well as the price inelasticity of tobacco products offset the (i) ongoing decline in cigarette consumption, particularly in mature markets; and (ii) increasing pressure from regulatory changes. In particular, Moody's notes that (i) BAT's global market share of around 24.5% (excluding the US, China and duty free); and (ii) the even distribution of the group's profit generation across all major regions should shield the company from increasingly challenging market conditions in Western Europe.

Moody's recognises that BAT's profitability and business profile have improved significantly over the years and financial leverage has reduced since the peak reported in 2008-09. Despite the recent increase in its share buyback programme from GBP750 million per annum to GBP1,250 million and our expectations that this might exceed free cash flow generation (according to our definition, i.e. after dividends), we would expect key credit metrics to remain at current levels indicating upward pressure on the rating. If operating performance were unexpectedly to deteriorate, Moody's would also expect BAT to reduce returns to shareholders in order to preserve its target metrics.

The positive outlook also reflects Moody's view that BAT will balance share buybacks with potential acquisitions and our expectation that the company will compensate for slightly declining volumes in mature markets by increasing prices and growth targets in emerging markets.

WHAT COULD MOVE THE RATING UP/DOWN

BAT's rating could be upgraded if BAT demonstrate its ability and intention to maintain, on an ongoing basis, (i) a financial leverage, measured as debt/EBITDA (as adjusted by Moody's for operating leases and pension deficit) around 2 x; and (ii) a retained cash flow (RCF) to net debt ratio in the high teens.

Negative pressure on BAT's ratings could arise if the group's credit metrics were to deteriorate, with the company reaching and maintaining a financial leverage of around 3x on an ongoing basis and an RCF/net debt ratio significantly below 15%. Downward pressure on the rating could also result from an increase in the group's litigation exposure.

The following ratings were affirmed:

British American Tobacco Plc

Long-Term Issuer Rating of Baa1

B.A.T. International Finance Plc

Long-Term Issuer Rating of Baa1

BACKED Senior Unsecured (foreign and domestic currency) ratings of Baa1

BACKED Senior Unsecured MTN Programme (foreign currency) ratings of (P)Baa1

BACKED Commercial Paper (foreign currency) ratings of P-2

B.A.T Capital Corporation

BACKED Long-Term Issuer Rating of Baa1

BACKED Senior Unsecured MTN Programme (domestic currency) ratings of (P)Baa1

B.A.T Industries Plc

Long-Term Issuer Rating of Baa1

British American Tobacco Hldgs (Nederlands)

BACKED Senior Unsecured (foreign and domestic currency) ratings of Baa1

BACKED Senior Unsecured MTN Programme (foreign currency) ratings of (P)Baa1

The outlook on all ratings is positive.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was the Global Tobacco Industry Methodology published in November 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in London, BAT is the second-largest tobacco company in the world with approximately 22% of cigarettes sold outside of the US and China, selling its products in more than 180 markets and holding leadership positions in more than 50 countries. BAT has developed a diversified portfolio of more than 200 brands, including its four Global Drive Brands (GDBs) -- Dunhill, Lucky Strike, Pall Mall and Kent -- as well as strong regional brands such as Viceroy and Vogue. For the financial year ending 31 December 2011, the group reported net revenues of approximately GBP15.4 billion and sold 705 billion cigarettes (excluding associates).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Paolo Leschiutta
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Moody's changes BAT's ratings outlook to positive; the Baa1/P-2 ratings are affirmed
No Related Data.
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