Ust Debt

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Debt Policy at UST

1. How well is UST doing?

* UST has been doing extremely well. Revenues and earnings are growing at 9% and 11% respectively. * Named by Forbes as one of the top companies in terms of profitability. ROC, ROE and GPM one of the industry highest. * Paying back generous dividends of $2.2b and repurchasing $2b from 1988 to 1998. * However, they seem to be losing market share in the premium market to competitors and have not been able to make an impact in the Price Value tier.

2. Main sources of risk for UST cash flows?

* Pending health-related lawsuits
* Legislation (marketing restrictions) against the company could happen – New laws to stop tobacco use by young people * Changing consumer habits against tobacco
* Increased competition from both premium and price-value producers - USTs strategy is to launch similar products to fight competition may not always work as has been seen in the price-value segment * The demand for smokeless tobacco products was minimal in international markets and product expansion outside USA for greater market segment was not much of an option for UST. Consequently, a weak US economy could affect domestic consumption.

3. Comment on USTs capital structure. What might explain such a structure?

* Total Debt to Value is 17.6% which is low compared to the other Tobacco manufacturers. * It is a sign that UST is able to generate healthy cash flows and function well with low levels of debt. * On the other hand, it could also be an indication of not being able to identify or take advantage of new growth opportunities.

4. Factors important to credit and bondholders in analyzing UST? What credit rating would you assign to for a moderate addition of debt?

Factors that may be important to credit and bondholders are

* Brand name and market position - Superior
* Ability to generate cash flows - Superior
* Cyclicality of revenues - Superior
*...
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