Altria bonds widen amid leverage fears

By William Hoffman

NEW YORK, Dec 20 (IFR) - Bonds for the Marlboro cigarette manufacturer Altria are widening as the company looks to lever up with a minority stake in e-cigarette producer Juul.

Altria's investment, which could be announced as early as Thursday, would total US$13bn for a 35% stake, with a US$38bn valuation of the popular vaping company, according to CreditSights.

If the Juul investment goes through and both deals are financed with new debt issuance in the new year, that would push Altria's total debt load to US$28.3bn up from US$13.9bn, according to CreditSights.

S&P downgraded the company two notches to mid BBB from A- following the news citing a "significant increase in leverage." Moody's reaffirmed its A3 rating, but placed the company on negative outlook.

The company is poised to experience "substantial credit metric deterioration" if the deals go through, pushing gross leverage to 2.9x up from 1.4x, according to CreditSights.

Altria's bonds were moving wider in early trading on Thursday as they have all week since the announcement of the cannabis investment.

The company's 2.8% 2022 was the biggest mover, widening 31bp in early trading, according to MarketAxess data. The bond has moved 48bp wider this week to 151bp over Treasuries.

S&P noted the substantial regulatory risk Juul faces amid its fast ascent as the leading e-cigarette company by total sales.

The Food and Drug Administration announced last month that it would begin banning menthol cigarettes and flavored cigars generally, as well as restrict the sale of flavored e-cigarettes in stores and online.

However, the FDA stopped short of outright banning flavored vape pens, which have been linked to the rise of teen e-cigarette use.

Juul early on made its reputation as an enemy of big tobacco. But because Juul is a relatively new, company management may not have the expertise to navigate the regulatory landscape, CreditSights noted.

Pairing with Altria's extensive experience could be a motivator for the minority stake, the report added.

Given the volatility in the markets, January is going to be a difficult time for company like Altria to issue new debt financing, Jason Shoup, head of global credit strategy for Legal and General Investment Management.

He expects bond spreads could move wider than 300bp above Treasuries and any new issuance could come at a new issue concession of 15bp or more in the current environment, he added.

"The minority stake is a play on growth and delivery of their product to fit consumer tastes, but at the same time it comes with considerable regulatory risk, so it's not as obvious a slam dunk from the investor's perspective," Shoup said.

"In this market there is going to be a cost to pay and it could be a lot higher than syndicate teams, bankers and the issuers themselves are expecting."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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