Marlboro country

The FINANCIAL — Fitch ratings has on November 25 affirmed Philip Morris International Inc.’s (PMI) Long-term Issuer Default Rating (IDR) and senior unsecured rating at ‘A+’ respectively, and affirmed its Short-term IDR at ‘F1′. The Outlook is Negative.

PMI has maintained a conservative credit profile since Fitch changed its Outlook to Negative from Stable following the announcement of its USD1.9bn acquisition of Rothmans, Benson & Hedges Inc. in August 2008. However, today’s rating action reflects the risk that a continuation of the current pace of share buybacks could cause credit protection measures to deteriorate to levels that would no longer be consistent with an ‘A+’ rating.

PMI’s ratings also continue to reflect its strong positions in several buoyant non-US tobacco markets, the beneficial global brand concentration of Marlboro, and the balanced profile of its operations in cash-generative mature markets as well as in large developing markets with high growth potential.

Management is expected, as the current USD13bn buyback programme is completed in 2010, to issue guidance around February 2010 on the possibility of its renewal and potential size. Once this is clarified, Fitch will assess the effect on the company’s future net leverage (calculated on a lease, pension and put option adjusted basis) and the likelihood of any deviation over the medium term from an expected adjusted net leverage of 1.5-1.6x at most, and EBITDA/net interest cover of no less than 10x.

Fitch expects PMI’s organic sales and profit growth to continue in the medium term at least at the average levels delivered between FY05-YTD09 of 4% pa and 6% pa respectively, despite negligible volume growth (at best 1% pa). This is likely to be achieved due to PMI’s product and packaging innovations and through consumers purchasing more expensive cigarettes in the developing world, as well as pricing power and economy of scale efficiencies.

Barring any exceptional events and excluding working capital movements, PMI is expected to continue to generate annual free cash flow (FCF) above USD2bn, underpinning healthy financial flexibility. However, while bolt on acquisitions will contribute to top line and profit growth, Fitch expects this type of spending to continue to absorb part of the company’s FCF.

On the positive side, Fitch notes that, due to strong organic profit and revenue growth over FY08 and YTD09 to September 2009, mostly aided by a beneficial pricing environment, PMI has delivered FCF generation ahead of previous expectations. Consequently, the company has so far been able to maintain a conservative leverage profile, with adjusted net debt/Op. EBITDAR expected to be at 1.2-1.4x by FYE09. PMI is likely to achieve this, despite continuing to pursue its share buyback programme and medium-sized bolt-on acquisitions, with an average annual spend of USD5bn-USD5.5bn and USD1.3bn respectively over FY08 and FY09.