Moody’s cuts British American Tobacco to A3

Moody's Investors Service said it downgraded the long-term ratings of British American Tobacco plc (BAT) and its subsidiaries from A3 to Baa2.

The action follows the announcement that the company reached an agreement to acquire the outstanding 57.8% of the shares in Reynolds American Inc. for about $25 billion in cash (including about $500 million in fees) and $25 billion in British American Tobacco’s shares for a total enterprise value of roughly $97 billion, including $13 billion net debt assumed.

Moody's also confirmed the P-2 short term ratings.

The outlook is stable. This concludes the review that began on Oct. 21 when British American Tobacco initially approached the board of Reynolds.

"BAT's two-notch downgrade to Baa2 reflects the significant debt and resulting high leverage that it will incur to fund the RAI deal," Ernesto Bisagno, Moody's vice president, senior analyst and lead analyst for British American Tobacco, said in a news release.

"We expect BAT's leverage pro forma for the acquisition to increase to approximately 4.6x at December 2017, versus 3.1x we expected for BAT on a standalone basis in December 2016."

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