Fitch Rates RAI's $1.65B Senior Sec. Nts. Offering 'BB+'; Lowers RJR's Senior Notes to 'BB-'.

CHICAGO -- Fitch has assigned the following ratings to Reynolds American Inc.'s (RAI) debt offerings listed below.

RAI

-- Proposed guaranteed secured bank credit facility 'BBB-';

-- Guaranteed secured notes 'BB+'.

Fitch has also affirmed the following Issuer Default Ratings (IDRs):

RAI

-- Issuer Default Rating (IDR) 'BB'.

R.J. Reynolds Tobacco Holdings, Inc. (RJR)

-- Issuer Default Rating (IDR) 'BB'.

Additionally, the following ratings have been downgraded

RJR

-- Guaranteed Notes to 'BB' from 'BB+' (also placed on Rating Watch Negative);

-- Senior Unsecured Notes to 'BB-' from 'BB'.

The Rating Watch Negative on RJR's guaranteed notes indicates that if sufficient consents are obtained to amend the indentures, and the notes are not exchanged, the RJR notes will become unsecured.

The Rating Outlook for RAI and RJR is Stable. Pro-forma for the Conwood Acquisition, approximately $4.7 billion of debt is affected by the rating actions.

RAI issued $1.65 billion of new senior secured notes in three tranches; $625 million at 7 1/4% due 2013, $775 million at 7 5/8% due 2016, and $250 million at 7 3/4% due 2018. The net proceeds from the notes offering and borrowings from the company's proposed $1.55 billion six year senior secured term loan facility is expected to be used to finance the $3.5 billion Conwood acquisition.

Additionally, the company has a commitment for a new $500 million five-year senior secured revolving credit facility to be used for post-closing working capital needs. This facility will replace the existing revolving credit facility at RJR.

The guarantors of the new credit facilities include Conwood Holdings and its material subsidiaries, RJR and its subsidiaries (other than RJR Packaging, LLC) that guarantee the existing bank facility of RJR, Santa Fe Natural Tobacco Company, Inc. and Lane Limited. The security includes substantially all the assets of the guarantors.

The $1.65 billion senior secured notes have the same guarantors as the new senior secured credit facilities, other than RJR. However, RJR may guarantee the notes at a future date. These notes will be secured by the principal property of RAI, Conwood Holdings and its material subsidiaries that secure the new credit facility, subsidiaries of RJR that secure the new credit facilities and by assignment of RAI's security interest in RJR Tobacco stock.

RAI has commenced an exchange offer whereby holders of $1.45 billion of RJR guaranteed secured notes (RJR notes) are offered RAI exchange notes with guarantees and collateral identical to the new $1.65 billion notes issuance. The RAI exchange notes will have identical interest rates and maturities. The downgrade of the RJR notes reflects that they will have fewer guarantors than the proposed RAI notes. The RJR notes are placed on Rating Watch Negative indicating that if sufficient consents are obtained to amend the indentures, and the notes are not exchanged, the RJR notes will become unsecured.

Fitch downgraded the $89 million of senior unsecured notes reflecting the increase in secured debt in the company's capital structure, placing the senior unsecured debt in a more junior position.

The Stable Outlook reflects Fitch's view that industry fundamentals have improved considerably. The major tobacco companies have regained pricing power, which has led to material improvements in operating earnings. The risk of a substantial payout due to an adverse legal decision has diminished with several favorable decisions for the domestic tobacco industry at the appellate level.

Negative pressures on the industry include extensive smoking bans and rising excise taxes, which contribute to overall consumption declines. Fitch will continue to analyze the impact of these factors and may review the ratings if accelerated declines in operating earnings and cash flows occur. The ratings continue to rely heavily upon maintenance of significant liquidity to manage the remaining tobacco-related litigation risk. RAI currently has sufficient liquidity, including cash and short-term investments of $1.6 billion pro-forma for the acquisition as of March 31, 2006. However, Fitch remains concerned that RAI's 75% dividend payout constrains financial flexibility.

For additional information see Fitch's release dated April 27, 2006 at 'www.fitchratings.com'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, '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.