Imperial Brands Finance Netherlands B.V. — Moody’s assigns Baa3 rating to Imperial Brands’ new €1 billion notes

Rating Action: Moody’s assigns Baa3 rating to Imperial Brands’ new €1 billion notesGlobal Credit Research – 16 Mar 2021London, 16 March 2021 — Moody’s Investors Service (« Moody’s ») today assigned a Baa3 rating to the E1 billion backed senior unsecured notes offered by Imperial Brands Finance Netherlands B.V. and unconditionally and irrevocably guaranteed by Imperial Brands PLC (« Imperial or the company »). The company’s existing domestic and foreign ratings, including the company’s Baa3 long-term issuer rating, the (P)Baa3 backed senior unsecured rating assigned to the E15 billion debt issuance programme of its guaranteed subsidiary Imperial Brands Finance Netherlands B.V., and the Baa3 senior unsecured rating of its guaranteed subsidiary Imperial Brands Finance PLC are unaffected. The outlook remains stable.The new unsecured notes will be issued in a single tranche due March 2033 under the E15 billion existing debt programme of Imperial Brands Finance Netherlands B.V.. Net proceeds will be used for general corporate purposes including the refinancing of upcoming debt maturities.RATING RATIONALEImperial’s Baa3 rating reflects the stable cash flow generation of its combustible tobacco operations and reducing leverage, partly offset by high social and regulatory risks, limited diversification into more sustainable potentially reduced-risk tobacco products, and a high, though recently reduced, dividend payout. Although declining in the last three fiscal years, company-adjusted « Tobacco & NGP[1] » operating margins (adjusted operating profit divided by tobacco and NGP net revenue) remain above 40%, an exceptionally high level even in the generally very profitable consumer goods sector. The high and stable earnings generated from the combustible business and the somewhat low investment requirements of these operations result in strong and stable cash generation.Moody’s expects leverage, measured as Moody’s-adjusted gross debt to EBITDA, will further reduce over the next two years towards 3.0x from 3.6x at the end of fiscal 2020 (ended 30 September) driven by recent disposals and positive, albeit modest, free cash flow generation. This will more adequately positioning the company at the current rating level. Free cash flow, as defined by Moody’s i.e. post dividends and excluding proceeds from disposals, will remain positive in 2021 and improve in fiscal 2022, enabling the company to continue reducing debt.The tobacco sector remains exposed to significant social and regulatory risks reflecting the harmful nature of the products it sells for people’s health. As part of its new five-year strategy announced on 27 January 2021, Imperial intends to focus on its traditional combustible tobacco business, although it remains committed to its NGP business. As a result, the company’s social and regulatory risks will remain high in the next two years because it will continue to generate the bulk of its revenue and profit through traditional cigarettes and other tobacco products, which face increasingly stringent regulations and declining demand.Governance is in line with the UK Corporate Governance Code and best practices. Imperial is a publicly listed company owned by large institutional investors, none of which has an unduly high ownership and influence. The board’s composition broadly conforms with generally accepted best practices. Imperial is publicly committed to maintaining its investment grade credit rating with a stated net debt to EBITDA ratio at the lower end of the 2x and 2.5x range on a reported basis. Following a review in July 2020, management announced that « dividend growth will be progressive, increasing annually from its current level, taking into account underlying business performance ». Imperial remains committed to make no share buybacks until leverage is sufficiently low to build headroom against future potential adverse changes.LIQUIDITYImperial’s liquidity is adequate, underpinned by i) a cash balance of around GBP1.6 billion as of 30 September 2020, although subsequently reduced; and expected positive free cash flows in each of the next two years; ii) significant but manageable debt maturities over the next two to three years; and iii) access to substantial credit facilities. After the end of fiscal 2020, Imperial has exercised a call option to redeem a E1.0 billion bond three months before its maturity, thus reducing its cash balance. As at 31 January 2021, debt maturities mainly include less than GBP500 million of bonds due in calendar year 2021, nearly GBP2 billion due in calendar year 2022 and then between around GBP1.3-1.5 billion over the following three calendar years. A new 3-year senior syndicated bank facility of around GBP3 billion was signed in 2020.STRUCTURAL CONSIDERATIONSThere are no significant structural considerations to be made as the bulk of group debt is issued at or irrevocably and unconditionally guaranteed by the ultimate parent company of the group.RATING OUTLOOKThe stable outlook reflects Moody’s expectations that (i) Imperial’s leverage will reduce below 3.5x by the end of fiscal 2021, driven by debt repayments, thus falling in line with the expectations for its Baa3 rating category; and (ii) the company will continue to develop its NGP portfolio leading to increased revenue from the new categories.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGPositive pressure on the ratings would ensue if all of the following conditions are met:(i) a strengthening in business profile, as evidenced by improved organic growth, with price increases more than offsetting declining volumes in combustibles, and significantly increased NGP revenue contribution; (ii) tobacco operating margins maintained above 40%; (iii) RCF/net debt above 15%; (iv) Debt/EBITDA below 3x; (v) prospects of preserving strong liquidity.Conversely, any of the following factors could put negative pressure on the ratings: (i). a weakening in business profile either from an acceleration of the pace of declines of combustible volumes, diminished pricing power, significantly weaker operating margins if not more than offset by NGP growth; (ii) RCF/net debt below 10%; (iii) Debt/EBITDA sustained above 3.5x; (iv) negative free cash flow over an extended period; (v) weaker liquidity.PRINCIPAL METHODOLOGYThe principal methodology used in this rating was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.With net revenue from Tobacco & NGP of GBP8.0 billion in fiscal 2020 ended 30 September, Imperial is the fourth-largest tobacco company worldwide. The company sells cigarettes, roll-your-own tobacco, vaping products, cigarette paper and cigars. Its main brands are Davidoff, Gauloises, Lambert & Butler, Bastos, News, John Player Special, Fine, West, blu (vaping), Winston, Bastos, and Parker & Simpson.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Next Generation Products (NGP) is an Imperial definition including vapour products, next generation oral nicotine including all white oral snus. From the company definition it is not clear if heated tobacco is also included in NGP.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Roberto Pozzi Senior Vice President Corporate Finance Group Moody’s Investors Service Ltd. 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