JTI credit rating remains stable

A unit of Moody’s Investors Service said the P46.8 billion investment made by Japan Tobacco Inc. (JTI) to acquire cigarette maker Mighty Corp. would not affect JTI’s investment grade rating and stable outlook.

Moody’s Japan K.K. said in a comment the Aa3 ratings and stable outlook of JTI are unaffected by the acquisition of the assets of Mighty in the Philippines as well as the decision to buy Indonesia kretek cigarette company KDM and its distributor SMN for $1 billion.

“We believe the transactions are in line with JTI’s strategy to invest in new markets for sustainable mid- to longterm growth, with global cigarette volumes on a gradual fall,” Moody’s said.

The Aa3 rating is the fourth highest rating in Moody’s long-term corporation obligation rating and is judged to be of high quality and are subject to very low credit risk.

The debt watcher said the acquisitions would support the growth in JTI’s cash flow generation in the international tobacco business and help further strengthen the company’s geographic diversity.

The Japanese firm’s existing cash and loan facilities would fund the acquisition binge.

Moody’s explained the financial leverage of JTI as measured by adjusted debt/ EBITDA (earnings before interest, tax, depreciation and amortization), would remain within current expectations.

It added the adjusted debt/EBITDA of JTI would slightly deteriorate to around 1.7 times from 1.4 times in 2016 if the costs for the acquisitions are funded with new debt.

“We also expect that JTI can gradually lower the company’s financial leverage after the acquisitions, supported by consistent free cash flow from its existing businesses,” Moody’s said.

It explained the acquisitions would reduce its substantial financial cushion, therefore, additional material acquisitions before some prior deleveraging could negatively pressure the ratings.