Fitch Downgrades and Withdraws Lorillard's Ratings; Removes Negative Watch

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Lorillard Inc.'s (Lorillard) Issuer Default Rating (IDR) to 'BBB-' from 'BBB' as well as Lorillard Tobacco Co.'s IDR to 'BBB-' from 'BBB'. Fitch has also removed the Negative Rating Watch (originally placed on July 15, 2014) and assigned a Stable Rating Outlook. Subsequently, the ratings for Lorillard and Lorillard Tobacco Co. are withdrawn. The rating actions apply to $3.5 billion of outstanding unsecured debt. A full list of rating actions follows at the end of the press release.

KEY RATING DRIVERS

The ratings downgrade reflects the pressure on Lorillard's credit portfolio from its purchase by Reynolds American Inc. (Reynolds American) for approximately $24.7 billion on June 12, 2015. Effective today, brand assets and property of Lorillard were divided between Reynolds American and Imperial Tobacco Group (Imperial Tobacco) with Lorillard's best-selling cigarette brand Newport moving under Reynolds American, and other premium and value brands, Winston, Salem, Kent, and Maverick, as well as E-cigarettes blu E-cig and SkyCig flowing to Imperial Tobacco. Imperial Tobacco will also acquire Lorillard's physical assets, including manufacturing facilities. The ratings withdrawal results from the assumption of Lorillard Tobacco Co.'s debt by RJ Reynolds Tobacco Co., a wholly-owned subsidiary of Reynolds American.

KEY ASSUMPTIONS

Key assumptions within Fitch's rating case for Lorillard include:

--Completion of the purchase of Lorillard on June 12, 2015;

--Divestiture of certain Lorillard brands and property to Imperial Tobacco for $7.1 billion;

--Assumption of Lorillard Tobacco Co. debt by RJ Reynolds Tobacco Co.;

--Incremental debt to fund the transaction.

RATING SENSITIVITIES

Future developments that may individually or collectively, lead to a negative rating action:

--Rating pressure will arise if unadjusted leverage exceeds 3.5x at the end of 2017;

--A leveraging transaction such as another significant debt financed acquisition or active share repurchasing that impedes leverage reduction to the abovementioned target.

Fitch sees a positive rating action as unlikely over the intermediate term given the presently high gross debt leverage for the rating category.

LIQUIDITY

Liquidity was solid with cash and short-term investments of $2.25 billion and operating cash flow of $1.47 billion for the latest 12 months as of March 31, 2015. Excess liquidity is important given Lorillard's annual payment in April to the master settlement agreement (MSA) of around $1 billion.

FULL LIST OF RATING ACTIONS

Fitch had taken the following rating actions:

Lorillard Inc.

--Long-term IDR downgraded to 'BBB-'from 'BBB';

--Short-term IDR downgraded to 'F3' from 'F2'.

Lorillard Tobacco Co.

--Long-term IDR downgraded to 'BBB-'from 'BBB';

--Short-term IDR downgraded to 'F3' from 'F2';

--Senior unsecured bank credit facility downgraded to 'BBB-' from 'BBB';

--Senior unsecured debt downgraded to 'BBB-' from 'BBB'.

Fitch has removed the ratings from Rating Watch Negative , originally placed on July 15, 2014. The Rating Outlook is Stable. Subsequently, Fitch has withdrawn Lorillard and Lorillard Tobacco Co.'s ratings.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986322 Dodd-Frank Rating Information Disclosure Form

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986322

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150612005731/en/

Fitch Ratings
Primary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3164
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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