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Rating Action:

Moody's upgrades BAT's rating to A3; stable outlook

12 Mar 2013

Approximately $16.7 billion of rated debt affected

Milan, March 12, 2013 -- Moody's Investors Service has today upgraded to A3 from Baa1 the long-term issuer rating of British American Tobacco plc (BAT or the group) and the senior unsecured ratings of its guaranteed subsidiaries. Concurrently, Moody's has also affirmed BAT's Prime-2 (P-2) short-term rating. The outlook on all ratings is stable.

A full list of affected ratings is provided towards the end of this press release.

"Our upgrade of BAT's rating to A3 reflects the group's continued record of solid results and the expectation that it will maintain stable credit metrics as well as increase its profitability," says Paolo Leschiutta, a Moody's Vice President - Senior Credit Officer and lead analyst for BAT.

RATINGS RATIONALE

Today's rating action reflects BAT's ongoing solid results and Moody's expectation that, despite an increase in its share buyback programme, the group will maintain stable credit metrics and will be able to offset increasing regulatory pressure with increasing prices and rising contribution from developing markets.

For the fiscal year ended December 2012, BAT reported a 4% increase in net revenues at constant currency rates, to almost GBP16 billion, and a 3% rise in its adjusted operating profit, to GBP5.68 billion (or up 8% at constant currency rates), which compensated for a 2% decline in its organic volumes of cigarettes sold. Based on preliminary results, BAT's financial leverage, measured by debt/EBITDA, stood at 1.9x at year-end 2012 (unchanged compared to the year before), indicating the group's capability and intention to maintain a stable credit profile.

BAT's ratings are supported by a combination of a strong business profile and credit metrics that compensate for (1) the group's aggressive returns to shareholders; (2) increasing regulatory pressure; and (3) what Moody's perceives to be a 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, all offset the ongoing decline in cigarette consumption, particularly in mature markets. In particular, Moody's notes that BAT's global cigarette market share of around 22% (excluding the US and China), and the even distribution of its profit generation across all major regions, should shield the group from increasingly challenging market conditions in western Europe.

BAT reinstated its share buyback programme in 2010 and has gradually increased the amount of buybacks since, leading to a halt in improvements to its key credit metrics. The group has recently increased share buybacks again, to GBP1.5 billion per annum from GBP1.25 billion. Going forward share repurchases are likely to exceed BAT's free cash flow generation, resulting in increasing financial debt. Nonetheless, Moody's expects the group to compensate for this with growing cash generation, resulting in stable financial metrics going forward. BAT's ratings incorporate Moody's expectation that the group will maintain, on an ongoing basis, (1) financial leverage below 2.0x; and (2) a retained cash flow (RCF)/net debt ratio in the high teens in percentage terms. If BAT's operating performance were to deteriorate unexpectedly, Moody's would expect the group to reduce returns to shareholders in order to preserve the aforementioned target metrics.

OUTLOOK

The stable outlook on the rating reflects Moody's view that BAT will maintain stable credit metrics, balancing potential share buybacks with acquisitions. The outlook also reflects the rating agency's expectation that the group will compensate for slightly declining volumes in mature markets by increasing prices and growth targets in emerging markets.

WHAT COULD CHANGE THE RATING UP/DOWN

An upgrade is unlikely in the medium term, given Moody's expectation that BAT will either return excess cash to shareholders or use it to further consolidate the group's presence in the tobacco industry. Upward rating pressure could evolve over time following (1) a reduction in the company's litigation risk exposure; (2) the company's success in growing its profits year over year; and (3) success in reducing financial leverage towards 1.5x. Negative pressure on BAT's ratings could arise if its credit metrics were to deteriorate, with the group's financial leverage exceeding on a sustainable basis 2.0x (although the current rating could accommodate temporary deviation in financial leverage up to 2.5x) and an RCF/net debt ratio significantly below 17%. Downward pressure on the rating could also result from an increase in the group's litigation exposure.

The following ratings have been upgraded to A3:

British American Tobacco plc

- Long-term issuer rating to A3 from Baa1

B.A.T. International Finance plc

- Long-term issuer rating to A3 from Baa1

- BACKED senior unsecured rating to A3 from Baa1

- BACKED senior unsecured MTN rating to (P) A3 from (P) Baa1

British American Tobacco Hldgs (Netherlands)

- BACKED senior unsecured rating to A3 from Baa1

- BACKED senior unsecured MTN rating to (P)A3 from (P)Baa1

B.A.T Capital Corporation

- BACKED long-term issuer rating to A3 from Baa1

B.A.T Industries plc

- BACKED Long-term issuer rating to A3 from Baa1

In addition, the short-term rating of P-2 of B.A.T. International Finance plc was affirmed.

Headquartered in London, BAT is the second-largest tobacco company in the world based on revenues and volumes (excluding China) holding approximately 22% of market share excluding the US and China and 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 ended 31 December 2012, the group reported net revenues of approximately GBP15.19 billion and sold 694 billion cigarettes (excluding associates).

PRINCIPAL METHODOLOGY

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

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit 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 upgrades BAT's rating to A3; stable outlook
No Related Data.
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