S&P confirms RJ Reynolds

Standard & Poor's confirmed RJ Reynolds Tobacco Holdings Inc. including its senior secured notes at BB+ and non-guaranteed senior unsecured notes at BB. The outlook is negative.

S&P said the confirmation follows the company's announcement that it has signed a definitive agreement with British American Tobacco plc in which the two companies will combine the assets of their respective U.S. tobacco businesses: RJ Reynolds Tobacco Co. and Brown & Williamson Tobacco Corp.

The new entity (with an estimated combined U.S. market share of more than 30%) is expected to benefit from economies of scale and cost synergies as it becomes a larger No. 2 player behind Philip Morris USA (which claims almost 50% of the U.S. market). However, S&P said it believes that the new entity will face a continued difficult U.S. cigarette operating environment, as well as ongoing litigation risk.

RJ Reynolds' ratings are based on the company's No. 2 position in the declining domestic tobacco market, its declining brand volume and market share and significant uncertainties about future domestic operating performance and pricing strategies, S&P said. Furthermore, the U.S. tobacco industry continues to face significant litigation challenges. These factors are somewhat mitigated by the firm's strong financial condition and moderate financial policies.

S&P said it remains concerned about RJR's ability to implement the announced changes to its business plan quickly enough to stem further erosion of volume and operating profit, and there is also concern about integration risk from the merger. An expected decline of more than 40% in operating income for the full year of 2003 will cause a related decline in estimated EBITDA coverage of interest to more than 6x in 2003 from more than 8x in 2002.

For RJR to maintain its rating, S&P expects the company to meet its forecast, lower costs as planned, and sustain its cash flow coverage measures at these reduced levels. Although the company has not provided financial details of its merger, S&P believes that pro forma credit measures will not be hurt considering the debt-free nature of the asset contribution.

Fitch confirms R.J. Reynolds, off watch

Fitch Ratings confirmed R.J. Reynolds Tobacco Holdings, Inc. and removed it from Rating Watch Negative following the Illinois Supreme Court's granting a stay of the Turner 'lights' cigarettes class action against R.J. Reynolds Tobacco and the announcement to combine its operations with Brown & Williamson. Fitch rates RJR's guaranteed senior notes and bank credit facility BB+ and senior notes BB. The outlook is negative.

Overall, the combination transaction is viewed positively and the combined companies should be better able to minimize or compensate for industry issues in the highly promotional and competitive U.S. tobacco industry, Fitch said. Reynolds American, with greater scale and cost efficiencies, also is expected to compete more effectively with the market leader. A primary driver of the lower cost structure for Reynolds American is the potential for $500 million of annual synergies within two years of the closing. These cost savings are beyond the $1 billion R.J. Reynolds plans to achieve by year end 2005, of which at least $350 million is expected to be realized in 2003.

The negative outlook is because of continued heavy promotional expenditures, competition from other premium brands as well as deep discount brands and consumption declines, possibly at accelerated levels, Fitch said. Also of concern is the execution risk of implementing a large scale restructuring and a significant business combination simultaneously.

RJR's ratings rely upon maintenance of conservative financial policies and a high degree of liquidity to manage the uncertainties surrounding the current tobacco operating environment and tobacco-related litigation.

Moody's raises R.J. Reynolds outlook

Moody's Investors Service raised its outlook on R.J. Reynolds Tobacco Holdings, Inc. to stable from negative and confirmed its ratings including its guaranteed senior secured debt at Ba2 and non-guaranteed unsecured debt at B2.

Moody's said the action follows the signing by RJR and British American Tobacco of a definitive agreement to combine the assets and operations of their U.S. tobacco operating subsidiaries R.J. Reynolds Tobacco Co. and Brown & Williamson Tobacco Co.

The change in outlook to stable reflects Moody's belief that the proposed transaction offers greater opportunities than risks for the combined enterprise. Specifically, Moody's anticipates that the debt-free contribution by BAT to RJR of Brown & Williamson's operating assets would allow RJR to reduce its costs in the areas of manufacturing and overhead.

However, offsetting those benefits would be the assumption by RJR Tobacco Co. of Brown & Williamson's legal liability. In addition, U.S. cigarette manufacturers continue to face challenges caused by declining volumes in the US cigarette market and strong competition from low price point manufacturers.

Assuming that the transaction is completed, achievement of expected cost reduction benefits, decrease in the competitiveness of "deep discounters" and improvement in the long-term legal risk could contribute to place upward pressure on the ratings, Moody's said. Non-achievement of cost reduction benefits, maintenance or increase in the threat from "deep discounters" or increase in the long term legal risk could place downward pressure on the ratings.

S&P upgrades Actuant

Standard & Poor's upgraded Actuant Corp. including raising its $100 million revolving credit facility due 2006 and $85 million term A loan due 2006 to BB from BB- and Actuant Finance Corp.'s $200 million 13% notes due 2009 to B+ from B. The outlook is stable.

S&P said the upgrade reflects Actuant's reduced debt leverage, solid profitability amid challenging industry conditions, free cash flow generation and disciplined growth strategy.

Actuant's ratings reflect its below-average business profile, since the company sells to small, cyclical industrial markets, combined with fair financial flexibility, S&P added.

Actuant's above-average financial risk arises from the company's growth strategy, which emphasizes opportune niche acquisitions, and fair cash flow protection, S&P said. The company's historically stable operating profitability, with EBITDA margins in the 18%-20% range, declined to the mid-teens in fiscal 2003, in part because of the acquisition of Kopp, with its single-digit margins, in September 2002. Occasional acquisitions could periodically pressure leverage ratios.

Nevertheless, the company's low working-capital intensity and modest capital expenditure requirements should allow Actuant to generate positive free cash flow in the next few years.

Most of Actuant's credit measures improved year-over-year in fiscal 2003, with 2003 year-end total debt to EBITDA declining to 2.4x, from 2.8x, and funds from operations to debt of about 26%, compared to 19% in fiscal 2002. S&P expects Actuant's funds from operations to total debt to average about 20% to 25%, and total debt/EBITDA to average in the 2.5x-3x range, over the business cycle.

S&P lowers Constar outlook

Standard & Poor's lowered its outlook on Constar International Inc. to negative from stable and confirmed its ratings including its bank loan rating of BB- and subordinated debt at B.

S&P said the action reflects the weak trend in Constar's operating performance in 2003 and resultant high debt leverage, negative free cash flows and somewhat diminished liquidity.

Constar's lower-than-expected operating results in the first half of 2003 reflect volume declines (in U.S. carbonated beverage bottles) owing to unfavorable weather conditions; a shift to smaller, less profitable bottles; and the effect of price concessions granted to extend some customer contracts, S&P added. Operating margins declined to about 9% in the second quarter of 2003, from historic levels of about 13%, and have been lower than those of its rated peers, given its product mix emphasis on the high-volume and relatively lower-margin containers for carbonated beverages.

Constar is aggressively leveraged, and disappointing earnings have led to deterioration in credit measures to sub-par levels, S&P said. Based on the company's revised earnings guidance, total debt (adjusted for capitalized operating leases) to EBITDA is expected to be near 7x at the end of 2003, from about 4x in 2002. Liquidity is expected to further decline, given the adverse trend in operating performance for the remainder of 2003, and negative free cash from operations expected for the year.

Moody's upgrades Dura liquidity, rates notes B1

Moody's Investors Service assigned a B1 rating to Dura Operating Corp.'s $50 million of incremental guaranteed senior unsecured notes and upgraded Dura Automotive Systems, Inc.'s speculative-grade liquidity rating to SGL-2 from SGL-3.

Moody's noted that on Monday it rated Dura's new credit facility at Ba3, confirmed its existing ratings and lowered the outlook to negative from stable.

Moody's said that net proceeds from the incremental senior notes offering will be added to Dura Automotive's balance sheet cash and will replenish most of the cash used by the company to acquire The Creation Group during July 2003.

The upgrade of Dura's liquidity rating to SGL-2 from SGL-3 reflects the material improvement in the company's available liquidity (cash plus effective unused revolving credit availability) resulting from the combination of Dura's incremental senior notes offering and the approved amendment and restatement of Dura's guaranteed senior secured credit agreement.

Despite the decline in Dura's revolving credit commitment to $175 million (from $390 million), effective availability under the facility will be substantially improved by virtue of material amendments to the company's financial covenant requirements, Moody's said. Available liquidity going forward should exceed $300 million, compared to the $125 million to $175 million range estimated upon the initial assignment of the speculative grade liquidity rating of SGL-3 on Sept. 12. Dura notably has had no outstandings under its revolving credit facility upon each of the last seven quarter ends, and does not require the larger commitment.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.