DBRS Places the Ratings of Rothmans, Benson & Hedges Inc. Under Review – Developing Implications

DBRS has today placed the ratings of Rothmans, Benson & Hedges Inc. (RBH or the Company) Under Review with Developing Implications, following yesterday’s announcement that: 1) the Company has reached a $550 million settlement with the federal and provincial governments with respect to the RCMP investigation involving contraband tobacco; and 2) Philip Morris International (PMI) has reached an agreement to purchase Rothmans Inc. PMI and Rothmans Inc. own 40% and 60%, respectively, of RBH. The Company’s ratings were last confirmed on October 30, 2007 at BBB (high) and R-2 (high) with a Negative trend.

RBH has been the subject of an ongoing RCMP investigation surrounding the illegal smuggling into Canada of non-tax paid cigarettes originally shipped by tobacco companies to the United States. Non-tax paid cigarettes are intended for export only and if smuggled back into Canada for re-sale are then considered contraband. Demand for these cheaper contraband cigarettes increased from 1989 to 1994 due in part to rising domestic tobacco taxes that raised the prices of legitimate tax-paid cigarettes.

Both RBH and Imperial Tobacco Canada Ltd. have pleaded guilty to “aiding persons to sell and be in possession of tobacco manufactured in Canada that was not packed and was not stamped in conformity with the Excise Act”. DBRS believes that now that the matter has been settled, the certainty of resolution is a positive factor for the Company, eliminating at least one aspect of its many legal issues. As part of the settlement, RBH has agreed to pay a $100 million fine and $450 million in additional settlement costs payable over the next ten years.

In conjunction with the resolution of this matter, RBH expects to repay its currently outstanding 5.552% Senior Unsecured Bonds in the principal amount of $150 million (the Bonds). Although the Bonds have a scheduled maturity date of December 21, 2011, the terms of the settlement may result in an event of default under the terms of the trust indentures pursuant to which the Bonds were issued. RBH has entered into an agreement with JP Morgan Chase Bank, N.A. for a $200 million one-year revolving loan facility, the proceeds of which will be used to repay the principal amount of the Bonds together with accrued interest and the make-whole premium.

Following the settlement announcement, Rothmans Inc. announced that its board had recommended a takeover offer from PMI for $30 per common share. The transaction, which values Rothmans at $2.0 billion, will result in RBH becoming 100% owned by PMI (currently, Rothmans and PMI own 60% and 40%, respectively, of RBH). PMI, the maker of Marlboro and seven of the top 15 global tobacco brands, is the world’s largest tobacco manufacturer, generating sales of approximately $23 billion. The transaction, which remains subject to shareholder and regulatory approval, is scheduled to close by the end of October 2008.

As part of our review, DBRS will consider the financial impact of the legal settlement on RBH’s credit profile and the potential impact of PMI’s 100% ownership on RBH’s business strategy and financial profile. In addition, DBRS will seek an update on ongoing legal proceedings, which were also a key factor in establishing the Company’s current Negative trend. We note, however, that since RBH intends to repay the Bonds currently rated by DBRS, there is a high likelihood that the current ratings will be discontinued.

Note:
All figures are in Canadian dollars unless otherwise noted.