Fitch Initiates Coverage of UST; Bk Facility `A', Sr. Uns `A-`, CP `F1'.
NEW YORK--(BUSINESS WIRE)--Nov. 28, 2001
Fitch has initiated coverage of UST, Inc. assigning an `A' rating to its $1 billion secured bank credit facility, an `A-` rating to its $540 million senior unsecured notes, and an `F1' rating to its commercial paper program. The $1 billion bank facility consists of a $300 million revolver, a $370 million 3 year term loan (including a $170 million letter of credit) and a $330 million 4.3 year term loan. The facility is secured by UST's cash and cash equivalents, investments, accounts receivable, tax claims and inventory. The Rating Outlook is Stable.
UST, through its subsidiaries, is the largest manufacturer and distributor of smokeless tobacco products in the US with approximately 77% share in the moist tobacco segment. The company's smokeless tobacco products include the leading brand names Copenhagen and Skoal. UST's other business, albeit smaller, is the production of premium varietal wines from its vineyards in Washington State and California. Recognized brand names include Columbia Crest and Chateau St. Michelle.
Over the past five years, UST has generated modest annual sales growth, however operating earnings and cash flow generation are solid due to high EBITDA margins of over 50% in each year and low working capital requirements. Debt protection measures are strong despite a rapid increase in debt in 1999 due to stock repurchases and in 2000 related to the posting of a $500 million bond. The company generates considerable cash flow, which has historically funded a high dividend payout and modest capital expenditures.
In March 2000, a Kentucky Federal District Court assessed $350 million in damages against UST for antitrust violations. The damages were trebled by statute to $1.05 billion. UST strongly disagrees with the jury verdict claiming that the court misapplied antitrust law and improperly allowed certain damage expert testimony. UST has appealed the decision and presented oral arguments on November 27, 2001.
In October 2000, UST was required to post a bond or cash for $500 million pending the outcome of its appeal. UST deposited $500 million cash in a court administered interest-bearing qualified Settlement Fund. In addition to the Settlement Fund, UST established a Collateral Account under the bank credit agreement requiring periodic deposits until June 2003. The aggregate balance in both accounts was $629 million as of September 30, 2001 and is expected to be $660 million by year end.
The above ratings assume a worst case scenario that UST loses its appeal and that the trial court verdict is upheld requiring it to pay $1.3 billion in damages and related costs. UST anticipates that a written opinion will be issued by the appellate court by mid-2002 by which time the sources for funding an adverse verdict would include more than $700 million in the Settlement Fund and Collateral Accounts, $200 million in cash reserves and the remaining balance available under the 3 year term loan. By suspending its share repurchase program in March 2000, establishing a $1 billion bank credit facility in October 2000 and allowing cash reserves to accumulate, UST is capable of funding a potential adverse judgment from the appellate court. Given the company's solid financial profile and high level of cash flow, UST is capable of funding this obligation while maintaining its strong credit rating profile.