TEXT-Fitch raises Imperial Tobacco Group Plc ratings

Fitch Ratings has upgraded Imperial Tobacco Group PLC's (ITG) Long-term Issuer Default Rating (IDR) and senior unsecured ratings to 'BBB' from 'BBB-'. The Outlook is Stable. Fitch has also affirmed the Short-term IDR at 'F3'. The agency has also upgraded the senior unsecured ratings of the debt issued by ITG's subsidiaries Imperial Tobacco Finance PLC, Altadis Finance B.V. and Altadis Emisiones Financieras at 'BBB'. The upgrade reflects the leverage reduction achieved by ITG as well as its scope for some further de-leveraging.

Also, the company's profits demonstrated solid resilience, maintaining growth amidst regulatory pressure and lower disposable income in some of its key markets during 2010 and 2011, notably in Spain. With lease adjusted net debt / operating EBITDAR of 2.8x at FYE11 to September 2011 and the scope for further debt pay-down, Fitch views ITG's credit protection metrics as sufficiently comfortable in relation to its financial policies.

ITG distributes the majority of its annual pre-dividend free cash flow (FCF) to shareholders via dividends - it has a 50% pay-out dividend policy - and a share buyback programme of GBP500m per annum. ITG's focus on the European Union provides it with operations in the region of the world characterised by the highest pricing environment. Combined with the high efficiency of its operations, this gives it the highest EBITDA margin in the industry jointly with Philip Morris International Inc (PMI, 'A'/Stable) and enables it to maintain a strong annual FCF (pre-dividends and working capital changes) of GBP1.6bn.

Contrasting with these positives, Fitch notes that ITG's growth perspectives remain the weakest of the four international tobacco companies, due to its more limited exposure to large developing markets. This has contributed, together with the higher weight that Spain carries in the company's portfolio, to its deteriorating volume and weaker price/mix performance relative to peers over 2009-2011. ITG's organic profit growth was 6% and 1% in FY10 and FY11 respectively, against high single-digit to low-teens growth enjoyed by British American Tobacco ('BBB+'/Stable) and PMI in the same period.

Despite this rating action, trading difficulties causing a contraction of FCF margin below 3% or any debt-funded acquisitions or changes to shareholder distribution policies leading to an increase of net leverage above 3.0x on a permanent basis could lead to a downgrade. A further upgrade is currently constrained by the maturity of the markets in which ITG operates and by its shareholder friendly financial policies.