DBRS Confirms Rothmans, Benson & Hedges at R-1(low), A(low)

DBRS has confirmed the ratings of Rothmans, Benson & Hedges, Inc. (“RBH” or the “Company”) as indicated above at A (low) and R-1 (low), with Negative trends.

DBRS notes that enforcement actions continue to represent a meaningful event risk to the Company that could warrant a (possibly significant) downgrade to the ratings due to the potential impact on RBH’s liquidity and its financial profile. However, other than the ongoing investigation being conducted by the Royal Canadian Mounted Police (the “RCMP”) since early 2002, RBH is not being investigated nor has it been contacted by any other federal or provincial entity with respect to its alleged participation in smuggling activities and/or taxes owed in connection thereto.

To date no charges have been laid against the Company or its employees by the RCMP. Tobacco litigation in Canada remains in its early stages when compared to tobacco litigation in the U.S., and DBRS understands that its impact remains difficult to quantify at this time. Nonetheless, it places an implicit ceiling on the credit ratings of the Company. With respect to the lawsuit initiated by the Province of British Columbia in 2001 to cover health care costs, the Supreme Court of Canada heard an appeal in June 2005 by RBH and other manufacturers, and a decision is expected by the end of 2005. While Canada’s first tobacco class action lawsuit was denied certification in Ontario in 2004, during 2005 two class action proceedings have been authorized to proceed in the Province of Québec.

Notwithstanding tobacco litigation, the ratings continue to be supported by the Company’s ongoing generation of strong and consistent earnings, which have recently benefited from the higher volumes generated by the Company’s cigarette price category brands.

During F2005, RBH was able to successfully retain and grow its leading position of the cigarette price category, generating an overall volume increase of almost 13% (versus a 6.6% decline in composite industry domestic volumes over the same period). However, while RBH has had first mover advantage into the cigarette price category, the other leading Canadian manufacturers now have volumes and market share similar to RBH in that segment, albeit on a combined basis. Accordingly, DBRS expects price competition will begin to further intensify as the segment now appears to be maturing.

DBRS expects the Company’s earnings and cash flows are expected to remain relatively stable in the near term. Despite the high debt-to-capitalization ratio, the financial profile is viewed as strong based on the relatively high level of cash flow generated by the Company (which is mostly paid out as dividends).

Note:
Prior to December 2004, the Senior Unsecured Debt rating was a Corporate Rating.