Fitch Ratings on May 30 affirmed British American Tobacco PLC's long-term issuer default rating and senior unsecured ratings at BBB, citing the company's position as the largest global tobacco industry player, among other factors.
The rating agency also affirmed the company's short-term issuer-default rating at F2, as well as its stable outlook.
Fitch said the London-based cigarettemaker has a strong business risk profile due to its industry position, as well as its regional and brand diversification, including scope to grow next-generation products. The agency added that BAT is exposed to a wide range of mature, cash-generating and emerging markets offering growth potential.
Fitch said BAT's rating remains constrained by an elevated financial risk profile after the company's full integration of Reynolds American Inc., which it acquired in 2017. The agency said BAT's rating has low financial headroom following the Reynolds acquisition, with funds from operations adjusted net financial leverage currently at around 5.0x. However, Fitch said BAT benefited from the full integration of Reynolds in 2018, leading to greater scale and control in the North American markets.
The rating agency expects BAT's free cash flow margin to trend toward 10% based on mildly growing revenues and its EBITDA to witness stable margins of around 44%.
Meanwhile, Fitch said it did not take into account BAT's Canadian operations, Imperial Tobacco Canada Ltd., after the unit secured creditor protection under the Companies' Creditors Arrangement Act of Canada in March. The unit is facing a C$15.6 billion class-action lawsuit along with the Canadian units of Japan Tobacco Inc. and Philip Morris International Inc.
Fitch said Imperial Tobacco has since been segregated from the wider BAT group after the unit entered the Companies' Creditors Arrangement Act.
The agency said it could upgrade BAT's ratings if the company's funds from operations adjusted net leverage drops below 4.0x, if its free cash flow margin remains at least in the mid-single digits as a percentage of sales, or if funds from operations fixed charge coverage return above 6.0x.
A negative rating action is also possible if BAT sees insufficient annual free cash flow to generate a steady de-leveraging path and reduce below the £1 billion mark, if no visibility of funds from operations adjusted net leverage reduce below 4.5x over 2019 to 2022, or if fixed funds from operations fixed charge cover drop below 4.5x.